Over One-Quarter of the Population on the Brink of Financial Disaster, Need Discipline

Here's a frightening money statistic from the March issue of Money magazine:

28% of workers say they are one setback away from financial disaster.

Yikes!!!!

I can't say I'm really shocked to read this, but it's still unsettling to see it in print.

So what can people in this situation do to get out of it? Here are my suggestions:

1. Stop spending more than you earn. This also means to quit borrowing to support an over-extravagant lifestyle.

2. Pay off debt -- credit card debt first and then get out of all other debt.

3. Establish an emergency fund so when a setback occurs, you're prepared for it.

4. Start to save, invest, and prepare for life's big expenses like college for the kids and retirement.

It seems simple to see it typed out -- just four easy steps -- but it requires discipline, something most Americans don't have much of when it comes to money.

Think it's impossible to save money because you earn so little? Check out page 30 of Kiplinger's Personal Finance May issue. It tells the story of Bob Przybylski who is 44, single and "invests $16,000 a year, about one-third of what he earns as a producer for a public-TV station."

Yes, it can be done, as can eliminating 15 years of debt in 14 months. But it requires discipline.

Comments

[DebtBlog]

Bob P. is at an advantage because he's single. Much easier to invest a third of your pretax dollars when you've got no family to support. In addition, he must live very frugally, if he can live on only $15,000 a yr. That, or he's found some really cool way around taxes. Maybe he can pass that info on to the rest of us.

I agree though, eliminating all credit card debt, especially that with an interest rate of over 7% or so, is vital to your financial health. You can take advantage of debt as well. Use it to your advantage by leveraging your assets to create wealth, such as in real estate. Leverage and frugality will lead to finaincial independence.

[Apex]

I am surprised at the 28% number because I would think its too low. In fact since the way it is phrased above it sounds like its a self reported number I suspect the real number is higher because atleast some of the people who are clueless about their finances are in fact clueless that they are clueless about their finances. Namely. They are living paycheck to paycheck and don't consider that to be financially dangerous. Why should they, they have always gotten by before and besides, you can just get more credit cards and pay $20/month.

I would not be surprised to see the number climb up towards 40-50% and given how many people have taken out interest only and 3-5 year ARMS in the last 2-3 years there are likely a number of people who are more debt extended than they realize and that will also come home to roost in the next couple years.

The reason I think 28% is low is I have a friend who does mortgages and when I did a refi over a year ago he told me that nobody who he does refi's for is in my situation financially. Namely that they have plenty of assets outside of their house and no other debt. The norm is they have no other assets outside their home and they have multiple credit card balances and multiple car loans in addition to student loans, furniture loans, etc. He said most of the people are what he would term 90 days from bankruptcy. The loss of income will result in bankruptcy in 90 days.

I think 28% is probably low. If we ever saw 12-15% unemployment, I can't imagine how things would crumble.

[mapgirl]

Actually, instead of paying down the credit card debt first, I'd squirrel away some savings at the same time. If a person is truly one check away from financial ruin, they can change that outlook by saving up one paycheck's worth of cash. Suddenly they're looking at two pay cycles before disaster, instead of 1. Save up the recommended 3 months' worth, and you're looking at the more typical job search duration before financial ruin begins.

[Duane Gran]

If this is true, and I have no reason to doubt it, those who have liquid assets will be in a very strong position when poor planning runs aground reality for the 28%.

[Andrew]

Creating a written budget is critical for individuals and families who have never taken a look at their finances. Before you can save or spend less you must put your financial life on paper. That simple step will empower you to control your finances. Then you can take those other very important steps towards putting your financial life into order.

[matt]

Articles like this always suprise me. I just don't understand how come people can live so recklessly. I guess to each his own.

Matt
http://thefidelityreport.blogspot.com