5 Reasons Why You’re Broke: A Look at How Americans Spend Bank Account Funds

While the latest news proclaims that the economy is rebounding, the truth is that how Americans spend money is dismal. Spending is up, which is good for the economy — but can spell bad news for consumers on the individual level.

“Consumers who find themselves mired in debt are serving the larger economy at great personal sacrifice,” says Stuart Vyse, professor of psychology at Connecticut College and author of Going Broke: Why Americans Can’t Hold on to Their Money. ”The economy runs on consumption, and as a result, personal savings is never mentioned because it is considered counterproductive and a drag on the economy.”

According to the Employee Benefit Research Institute’s (EBRI) annual Retirement Confidence Survey, Americans are living longer — and they do not have anywhere near enough saved in their bank account for retirement. In fact, the report found that the majority of Americans (57 percent) have less than $25,000 in total household savings or investments.

Where and How People Spend Money — Instead of Saving

Certainly the recent tough times have reduced disposable income and the ability to save, are there other aspects influencing how Americans spend money? We asked financial experts why Americans can’t seem to keep their money in their bank accounts.

1) Lack of education about budgeting, investing and saving for retirement

“One of the main reasons that people don’t save money in the short- or long-term is that they’re simply unfamiliar with concepts such as setting a monthly or annual personal budget and saving for retirement,” notes Andrew Schrage, co-owner of MoneyCrashers Personal Finance.

2) No emergency savings

Too many people have experienced being out of work for long and short periods of time, have had a car breakdown or health crisis that an emergency fund could help cover.

“Despite how high a salary may be, one is likely to be broke due to the lack of preparation for emergencies. Emergency savings is the key to financial success and without it, you’re just making it more difficult to be financial stable,” says Xavier Epps, owner of XNE Financial Advising, LLC in Woodbridge, VA. According to the Bureau of Economic Analysis, Americans only saved 2.5% of their income on average for the month of April, Epps points out. “Consumers should aim to save much more in order to cover unexpected expenses and possibly job loss.”

3) High inflation

Some personal finance experts point to inflation as a big factor in suppressing people’s ability to consistently add to their bank account. “Our government deficit spending has skyrocketed, and the main cost of that spending is weaker buying power for the dollar,” comments Brian Luftman, founder and president
of American Farm Investors in Lexington, KY.

“Our government says inflation is at 3%, but Americans are paying significantly more for food, heating and cooling bills, gasoline and healthcare,” says Luftman. “All of those costs have virtually doubled since 2008, and very few Americans are making any more money than they were in 2008. I think real inflation is 10 to15% a year, and I don’t see that changing.”

too many people spend money they haven't earned

4) Overspending made easy

Rachel Parrent, Vantage Credit Union’s Community Engagement Manager, says, “With social media like Facebook and Twitter and we can see what everyone in our own social circle is doing, what they are purchasing, and where they are eating, traveling and shopping. Many times it makes us believe that if they can afford it, so can we.”Simply put, too many people spend money they haven’t earned. Vice President of Marketing at St. Louis, MO-based Vantage Credit Union, Kathy Palmer, says
 “People fall into bad habits like eating out regularly or thinking that spending a little here, a little there won’t amount to a lot by the end of the month. Credit cards and electronic purchasing make it much easier to spend than having cash in your pocket.”

These social pressures and the ease of spending combine to create an environment that “places enormous burdens on self-control” and how people spend money, says Vyse. “All of the barriers to consumption have been removed: you can shop 24-hours a day, with or without cash on hand. The urge to purchase something can be satisfied in minutes without ever leaving home.”

5) Taking on big, long-term loans

“Perhaps the worst mistake people make is to assume large, long term debt burdens that are difficult to escape without the certainty of enough sustained income to support them,” Vyse says. “In today’s world, the most common examples are student loans and mortgage  loans.” Should circumstances change and the borrower is unable to make monthly payments towards these debts, there is no quick-fix solution. “If you have calculated incorrectly or if your income drops, these kinds of debts can have a dramatic effect on your life and well-being.”

Considering that the average American college student graduating in 2011 had accrued $27,000 in student loan debt, rising college costs definitely play a role in the ability to save. “By having to make significant monthly payments for student loans shortly after graduating, it can be virtually impossible to start an emergency fund or begin saving for retirement,” says Schrage. “It can even make staying on top of monthly bills a challenge, which often leads to credit card debt.”

Brian Frederick, JD, CFP of
 Stillwater Financial Partners in 
Scottsdale, AZ adds that student debt doesn’t just affect younger generations, but parents as well. “I’m seeing more and more people sacrifice 
their own retirement savings needs and run up large credit card balances to 
fund their children’s college. This can result in credit card debt of 
$20,000 and up at high interest rates — without a lot of excess cash flow
 to pay down the debt, they just keep paying the interest and not a whole 
lot towards principal.”

Tips to Jump-Start Your Bank Account

Devotees of personal finance guru Dave Ramsey know that the first step to gaining financial independence is putting away $1,000 for emergencies. Other financial experts recommend an even bigger emergency fund of three to six months of expense, to act as a buffer.

Financial experts recommend going all out to eliminate everything but the basics to build up that emergency fund. That means cutting the cable off, cooking at home, trading the high-lease cars for low-cost transportation, hosting yard sales or finding another job to supplement your income. It’s drastic, but a necessary way to get through some tough times.

“Look for ways to cut or eliminate your monthly expenses and bills,” says Schrage. “Limit personal purchases only to those that you actually need, and clip coupons to save on groceries. All of these ideas should make for the ability to save at least a modest amount each month.”

In addition to limiting spending, Vyse advises cultivating a habit of saving. “The key is to make saving easy.” He recommends having a certain percentage of deposits automatically diverted to a savings account. “This way, money is saved no matter what else happens, and it does not require a deliberate action on your part.”

Anne Dullaghan


Post to Twitter

How much do bad habits cost?

A cigarette here, a few drinks there and choosing potato chips over baby carrots all add up. Indulging in vices is often portrayed as the fun part of life, but letting bad habits go unchecked can have a deleterious effect on your wallet — not to mention your health.

But don’t worry; you can change. A study by researchers at University College London in the United Kingdom shows that it takes a little more than two months on average to break a bad habit and form a new one.

The first step to kicking a bad habit is to understand exactly how it impacts you. Here’s how a few of the most common bad habits wreak havoc on your budget every year. Bankrate shows how you can reverse the trend and amass some serious money instead by annually investing those funds in a long-term savings vehicle that returns a modest 6 percent a year on average.

Smoking cigarettes

Smoking cigarettes © Romanchuck Dimitry/Shutterstock.com

Cigarettes retail for about $5 to $12 a pack, depending on where you live. But factor in increased medical expenses, insurance costs and the impact of secondhand smoke to society, and the real price increases dramatically. Researchers from Duke University and the University of South Florida estimate that, for a woman, the all-inclusive cost of smoking over a lifetime is $106,000; for a man, $220,000. This includes social costs imposed on others via Medicare, Medicaid and Social Security.

Richard Kappers, director of marketing at Cigna, says smoking not only drives up life insurance costs by 20 percent and increases health insurance expenses, it can also impact your ability to qualify for either.

But renouncing the habit pays off. Quitting smoking at age 39 can reduce the “excess risk of death from any cause” by up to 90 percent, according to a January 2013 article in The New England Journal of Medicine, and can qualify you for the same insurance rates as nonsmokers, says Kappers.

“Generally, they want you to be tobacco-free for 12 months before you can get the nonsmoker rates,” he adds.

It’s difficult to put a price on smoking for an individual. Considering just the cost of the cigarettes themselves, smoking a pack a day at $7 a pack will leave you $2,555 lighter in the wallet per year. If you instead invest that amount annually, after 30 years, you will have amassed $201,994, assuming a 6 percent return.

Drinking alcohol

Drinking alcohol © Ramon L. Farinos/Shutterstock.com

Unlike smoking, casual drinking won’t drive up insurance costs. But heavy drinking can cause liver damage and other health issues, says CFP professional Anna Molin, an independent insurance agent with Huntington & Wheatsworth insurance and financial services firm in Towaco, N.J.

“They will do a blood and urine specimen (during insurance medical underwriting),” she says. “(Alcohol) is tested in there, same as drugs. That could increase your premium,” though how much depends on the level of the damage.

Drinkers who get behind the wheel and land a conviction of a DUI (driving under the influence) or DWI, (driving while intoxicated) will also have to cough up around $10,000 in fines, bail, towing, insurance, legal fees, treatment and license reinstatement costs, according to the Georgia Department of Behavioral Health and Developmental Disabilities.

Drinking can still take a financial toll even if it’s done in moderation. Consume five drinks per week at a cost of $6 per drink (budget more if you’re swigging cocktails versus beer or wine), and you’ll rack up a $1,560 tab by the end of the year. If you instead invest that amount annually, after 30 years, you will have amassed $123,331, assuming a 6 percent return.

Poor eating habits

Poor eating habits © Nitr/Shutterstock.com

More than 1 in 3 U.S. adults is obese and therefore more prone to obesity-related health conditions, including heart disease, stroke, Type 2 diabetes and certain types of cancer, reports the Centers for Disease Control and Prevention. They’re also prone to higher health and life insurance costs, medical expenses, food and clothing costs, decreased productivity, and lost wages from missing work.

A study by researchers at George Washington University in Washington, D.C., estimates that extra pounds cost the average overweight man $524 per year and the average overweight woman $432. For the obese, costs dramatically increase. GWU estimates that the annual cost of being obese in the United States is $2,646 for men and $4,879 for women.

Weight issues not only drive up costs; they can also prevent consumers from getting the coverage they need, says Kappers.

“Now you see diabetes and weight issues at the top of the reasons why people are getting declined (for life insurance coverage),” he says. “They’re hand in hand.”


Overspending © sheff/Shutterstock.com

“Human beings are simply wired to spend,” says Jean Chatzky, author of eight personal finance books and head of the online financial literacy program Money School. “Our brains get a lot of pleasure out of rewards that we can have right now and very little, if any, pleasure out of waiting for things.”

That may partly explain why the U.S. savings rate is currently a dismal 2.5 percent, according to the Bureau of Economic Analysis. Research shows that overspending isn’t just fun; it’s easy to do without noticing. According to a survey from the life insurance and capital management company Country Financial, more than 1 in 5 respondents said they spend more than they earn for at least half the year, but only 9 percent classified themselves as living beyond their means.

“If it’s a minor problem … then track your spending for a little while. You’ll see where the holes in your budget are and should be able to stop yourself,” says Chatzky.

Keep in mind that overspending costs you in the long term, too. Exceed your paycheck by just $100 per month — the equivalent of a modest date night — and you’ll rack up expenses of $1,200 per year.


Procrastinating © wavebreakmedia/Shutterstock.com

We’re wired to overspend, but we’re also naturally inclined to put off things we don’t want to do until it’s too late. Witness the hordes who don’t sign up for their 401(k) plans even though they get matching contributions from their employers. Even modest procrastination comes at a cost. Lose $50 monthly to an unused gym membership or grocery coupons that never got clipped, and you’ll lose $600 per year.

“If the cost of procrastinating something is high enough, you won’t do it,” says Dean Karlan, an economics professor at Yale University and co-founder of the goal-setting site, stickK.com.

One way to avoid procrastinating, Karlan says, is to make the cost of skipping that to-do item so high that you won’t avoid doing it. Sites such as stickK and apps such as GymPact allow procrastinators to attach a financial reward (or punishment) to their goals. But for incentives to work, Karlan says you have to want to change first.

“There is some needed self-reflection for any true behavior change,” he says. “It doesn’t have to be super deep and intense, but there does need to be some ‘aha!’ moment.”

Christina Couch

Post to Twitter

Yes, Credit Cards Are Making You a Bad Person

The cashless society — a world where physical money is practically obsolete — has, in just a few years, gone from a utopian dream to something like an inevitability. In Sweden, a national effort is underway to take the country cashless within two decades. Throughout Africa, it’s perfectly common for merchants to accept money through mobile phones by having buyers transfer a specific amount of money to a specific number associated with the merchant.

In the U.S., the road to cashlessness is paved in plastic (glass, too). In the 1970s, fewer than 20 percent of the adult population owned a credit card. Today, between 70 and 80 percent of the adult population does. In some cities, being forced to pay with cash already feels like a precious anachronism (“What do you mean I have to count the moneybefore extending my arm to the register?”).

The world of economic research has tried to keep pace with the plastic revolution, producing hundreds of reports on how MasterCard, Visa, and AmEx change our relationship to money and ourselves. The logic of credit is fairly simple. People rarely spend exactly what they earn, exactly when they earn it. With savings, we pass today’s earnings to the future. With credit, we pull expected future earnings into today.

The problem is that consumers (and perhaps Americans, in particular) aren’t so good at either. We don’t save much, and we’re awful at projecting future earnings, spending far more than we’re able to pay back quickly. Lower-income people, consumers who are worse at math, people who self-report emotional instability, introversion, or materialism, have all been found to get into trouble with credit cards. Here are some more findings from the reams of credit card research — and few of them are good.

Credit Cards Are Making You Irresponsible
The typical knock on credit cards is that they’re too effective at letting us buy stuff. Cash and coins must be considered, handled, counted, organized, re-counted, negotiated into the small space of a palm, and delivered cleanly to a merchant. Each of these verbs represents an inconvenience — a point of friction. But a card is just a card. Pull, swipe, finished. It’s so easy to spend whatever we want.

Too easy, actually. Research has shown that people who own more credit cards spend more over all; more in specific stores; more at restaurants; more on tips at restaurants … literally, there are hundreds of studies on the effect of credit cards on spending, and the vast majority of them find that, all things equal, we put more on plastic.

In 2001, two business professors from MIT organized an auction for Boston Celtics tickets where one group bid with cash and one group bid with credit. The credit card group offered nearly twice as much for the tickets. “Framing hypothetical purchases as credit card payments may significantly increase likelihood of purchase and willingness to pay,” the researchers wrote. They put their cheeky credit card advice right there in the headline: “Always Leave Home Without It.”

Credit Cards Are Making You Forgetful
The downside of counting money is that it takes time and effort. The upside is that it takes time and effort. That makes it more memorable. Cards make us forget we’re dealing with money. They create “an illusion of liquidity,” wrote Dilip Soman, a professor at the University of Colorado at Boulder, that makes consumers confuse the ability to spend money and the means to spend money. When paying with plastic, buyers have a tendency to outsource their mindfulness to the card. As a result, they were less likely to remember details about their purchases and more likely to buy additional items.

Credit Cards Are Making You Fat
The “pain” of paying with cash has a hidden benefit. It makes it harder to quickly capitulate to indulgences. Credit card “weaken impulse control,” Manoj Thomas, Kalpesh Kaushik Desai, and Satheeshkumar Seenivasan found in a 2011 paper published in the Journal of Consumer Research. “Consequently, consumers are more likely to buy unhealthy food products when they pay by credit card than when they pay in cash.” Studying the contents of shopping baskets, the three economists found that shoppers with credit cards bought a larger share of food items they had ranked as unhealthy. In this way, the permissiveness of credit cards weakens consumers’ judgment in more subtle ways than total amount spent.

Credit Cards Exacerbate Income Inequality 
It’s easy to see how credit cards might allow low-income families to spend more than they earn, allowing them to live a more comfortable upper-income life. But there are a few problems with that story. First, families can’t outrun their actual earnings, and too often credit cards provide the illusion of a better life followed by the crushing reality of debt and costly penalties. More subtly, credit cards create a transfer of money from the poor to the rich by punishing non-credit-card consumers. In their paper “Who Gains and Who Loses from Credit Card Payments?” Scott Schuh, Oz Shy, and Joanna Stavins pointed out that credit cards incur merchant fees that show up in other prices. Unable to impose a surcharge penalty on credit card customers alone, merchants often raise prices for all customers. This creates higher costs for non-card-carrying (often low-income) shoppers. So, credit cards both mitigate income inequality in the short run and exacerbate it in the long run.

Derek Thompson

Post to Twitter

Troubling Trend: Consumers Shedding Less Credit Card Debt

U.S. consumers paid down nearly $32.5 billion in credit card debt during the first quarter of 2013, that’s a 7 percent reduction compared to a year ago.

But that’s where the good news ends in terms of debt loads, according to CardHub.com‘s update on credit card balances. CardHub’s study found that U.S. consumers are on pace to rack up nearly $47 billion in new credit card debt this year.

The first quarter of 2013 marked the first time in a year that consumers did not improve their credit management, compared to the corresponding quarter the year before.

The average household currently has $6,591 in credit card debt.

This year is shaping up to be a lot like 2011. That’s when U.S. consumers began the year with a $32.7 billion pay-down — and ended the year having reacquired that amount, plus another whopping $46.71 billion on top of that.

A significant decrease in consumer debt is common during the first quarter of the year, when annual salary bonuses and tax refunds kick in. That’s when consumers also shift their focus to paying off purchases made during the holiday shopping season.

However, Americans paid off 7 percent less this year than they did during the first few months of 2012, when we finished with a $35.8 billion net increase in credit card debt at year’s end.

Credit card debt levels have continued to rise in recent years despite lessons learned from the financial crisis and Great Recession. Since the crisis peak in 2007-2008, credit management among Americans had been improving.

But the $32.5 billion in existing credit card debt that U.S. consumers paid off during the first quarter of 2013 represents the smallest first quarter pay-down in the past four years.

Americans paid off 7 percent more of our credit card debt in Q1 2012, 1 percent more in Q1 2011, 17 percent more in Q1 2010, and 28 percent more in Q1 2009.

“However, the numbers indicate that we’re starting to regress a bit, and that’s something that must be addressed before debt levels rise to the point where consumers can no longer sustain them and we default in droves,” said CardHub CEO Odysseas Papadimitriou. “That’s going to ultimately require a shift in perspective from the belief that living off credit is acceptable to an approach that emphasizes saving and responsible spending in the context of post-recession income levels.”

The credit card default rate continues to drop and is now at its lowest point since the fourth quarter of 2006, CardHub said.

But consumers have not taken advantage of their improved ability to pay their bills on time to also pay down their debts, the study found.


Post to Twitter

Bank of Canada Says Household Imbalances Will Be Slow to Correct

The Bank of Canada said record consumer debt loads remain the biggest domestic risk to the financial system and these imbalances will take time to unwind.

Slower credit growth and tighter mortgage regulations have curbed the risks that some families have taken on unaffordable debts, the bank said today in its semi-annual Financial System Review from Ottawa.

“These imbalances, which built up over many years, will take some time to correct,” the bank’s governing council members wrote in the report. “While a gradual unwinding of imbalances is expected, there is a risk of a sharper correction.”

The report is the first published under Governor Stephen Poloz who took the post June 3 as Mark Carney left to head the Bank of England. Poloz told lawmakers last week he is concerned about the risks posed by consumer debts that grew through the housing boom as banks increased mortgage lending. He also said the limits of domestic-demand led growth have become clear.

The overall risk level remained “high,” the bank said, because of dangers posed by Europe’s financial crisis and weak global demand, as well as a prolonged period of low interest rates globally that could lead some investors to take on too much risk.

The bank’s report has four categories of risk: moderate, elevated, high and very high. The risks posed by household debt remained elevated, the report said.

Record Debts

Household debt reached a record 165 percent of disposable income in the fourth quarter, and Finance Minister Jim Flaherty tightened mortgage rules last year to avoid what he called signs of overheated condominium markets in Toronto and Vancouver. Statistics Canada will publish first-quarter debt figures later this month.

The central bank forecast today that the debt to disposable income ratio will stabilize this year. Other signs of “constructive evolution” of household imbalances include slowing housing starts and resales since mid-2012, according to the report.

There are also signs of overbuilding in markets such as condominiums in Toronto that could trigger “an abrupt correction in prices,” the Bank of Canada said today.

“The Bank is working closely with other federal authorities to assess the risks related to household finances and the housing market,” the report said.

Greg Quinn

Post to Twitter

Consumer Reports Calls the FICO Credit Score ‘Useless’

An article in the July 2013 issue of Consumer Reports magazine (“Don’t Buy Useless Credit Scores”) highlighted the differences between the credit scores purchased by consumers and those used by lenders.

According to the authors, consumers typically purchase their FICO credit scores with the assumption it is the same one lenders use when considering them for a loan. But that may not be the case, after all.

Consumer Reports Calls FICO Product ‘Inferior’

FICO credit scores were created in 1958 by a company called Fair Isaac. FICO is actually an acronym for the Fair Isaac Corporation, the company’s original name. This company often accuses its competitors of using “FAKO” credit scores – that is, scores that are different from the ones used by lenders in their credit-making decisions.

However, according to Consumer Reports, the FICO credit scores that are sold to consumers for around $20 a piece can also differ from  the scores used by creditors and lenders (including mortgage lenders). Is the crow calling the raven black? Having reviewed the scoring information that FICO typically provides to lenders, Consumer Reports researchers went so far as calling the scores consumers can buy “inferior.”

If the consumer group has its way, we could eventually have free access to the same credit scores lenders use when considering us for car loans, mortgages and other types of financing. In March of this year, new legislation was proposed that would require the “free annual disclosure of scores that lenders actually use.” This legislation was introduced by Sen. Bernie Sanders (I-Vt.) and endorsed by Consumers Union, the parent company of Consumer Reports magazine.

Under the current system, consumers do not have access to the scores given to lenders. If it becomes law, the new legislation would change the status quo and usher in a new era of transparency.

CFPB: Consumers Should Not Rely on Credit Scores

In the fall of 2012, the Consumer Financial Protection Bureau (CFPB) – a financial watchdog agency created by the Dodd-Frank Act – examined the differences between the credit scores given to consumers and those used by lenders. The CFPB concluded that “consumers should not rely on credit scores” as a way of getting inside the minds of lenders.

The CFPB found that consumer and lender credit scores are often significantly different. In 20% to 32% of the cases they examined, reporting data was scored differently depending on the end product. In fact, the differences were so great that in some cases “the scores were one or more credit-quality categories removed from each other.”

The CFPB pointed out that “consumers can’t know ahead of time whether the scores they purchase will closely track, or vary moderately to significantly, from a score sold to creditors.” If that is the case, consumer credit scores would seem to warrant the “useless” label assigned by Consumer Reports.

The Increasingly Complex World Of Credit Scores

The further you dig into the credit scoring industry, the more complicated and convoluted it becomes. The study conducted by the Consumer Financial Protection Bureau last year considered five different scoring systems, some of which have become outdated. According to Steve Wagner, president of the Experian credit-reporting bureau, there are actually “hundreds of different scores.”

What’s a consumer to do or think? When you encounter a website that offers to sell you your FICO credit score, it all seems straightforward and simple. They typically claim the score you are buying is the one used by lenders when making decisions about you. But, as we have learned, this is not always the case. If these companies were more frank and candid about the incredibly convoluted world of credit scoring, consumers would probably be less likely to buy their scores. It’s a lack of transparency, to say the least.

It is the Home Buying Institute’s position that credit scoring, as a whole, needs a major overhaul. The current system is needlessly complex and suffers from a serious lack of transparency. If consumer financial information is collected and later used by lenders to make credit decisions, it should be made available to consumers.

Current federal laws require the three credit-reporting bureaus (Experian, TransUnion and Equifax) to provide free reports to consumers once per calendar year. But there is no such law for credit scores – unless the aforementioned legislation is passed into law.

The Consumer Reports article concludes by pointing out Fair Isaac (FICO) currently sells 49 different FICO score products to mortgage lenders and other creditors. But a subsidiary of this company, myFICO.com, only offers consumers two of those scoring products. The authors liken this to “handing someone a Diet Coke and calling it Classic.”

Brandon Cornett

Post to Twitter