We are now in day 34 of the partial government shutdown, the longest in US history. While most Americans have seen little or no disruption in their daily lives as a result of the shutdown, many of the 800,000+ government workers who have been furloughed find themselves in a financial crisis.
The reason: Almost 80% of Americans live paycheck to paycheck, and almost 60% have less than $1,000 in savings, according to a recent survey by GoBankingRates.com. Only 21% had savings of $10,000 or more. Let that sink in.
Even worse, the survey found that 42% of Americans will die broke. I had not heard that figure before. The 42% even includes those who have $10,000 in savings, since that won’t cover even one year’s worth of living expenses if they lose their job.
The Labor Department estimates that adults age 65 and older spend an average of $46,000 a year. That number may sound high, but as we’ll see below Americans are loading up their credit cards as never before.
Ten years after the financial crisis, the economic recovery has left millions behind with little to no savings, and the government shutdown serves as a preview for what will happen when we hit the next recession.
Within just a few weeks of the government shutdown, it was clear that many furloughed workers were struggling. Now that we’re over a month in, we hear stories about people turning to food banks to feed their families. We hear stories about people who are in dire straits because they can’t pay their mortgages and can’t get loans.
Living paycheck to paycheck with no savings only works if people keep their jobs and interest rates stay low. But interest rates won’t stay low; in fact, they’re already rising. Interest rates on bank-issued credit cards are now nearly as high as they were in 2000.
According to the Federal Reserve, more than 40% of all US households carry credit card debt, with the average American household carrying a balance of $5,700. For only indebted households, which excludes people who pay their balances in full every month, the average credit card debt is $9,333. The average US household had total outstanding debt of $135,768 including mortgages, credit cards and other debt.
The first two of the figures above seem low to me, especially the 40%. And they may be. Federal Reserve economist Joanna Stavins (Boston Fed) conducted her own independent survey by comparing what consumers said about their finances and credit cards and compared that with actual data from credit reporting agency Equifax. Here’s what she concluded:
“People tend to overreport the number of credit cards they have, underreport their balances, and greatly undervalue their credit limits.” Imagine that!
NerdWallet, a popular personal finance website, also does annual surveys on household debt and credit cards. As of December of last year, NerdWallet said the average American household had $6,929 in outstanding credit card debt. Even that may be low given Ms. Stavins’ findings that many people underreport their balances.
NerdWallet also reported that nearly 50% of households have rollover credit card debt, well above the 40% reported by the Fed. They also report that 48% of households with rollover debt make only the minimum required monthly payments. At that rate, they will never pay it off.
US credit card debt topped $1 trillion in early 2018, the highest level ever. As a result, credit cardholders are paying record amounts of interest and fees in their accounts. In the 12 months ended last September, cardholders paid a record $110.2 billion in interest and fees.
Finally, US total household debt, including mortgages, student loans and all other debt hit another record high of $13.5 trillion as of the end of the 3Q of last year, according to the Fed. It was the 17th consecutive quarterly increase in total household debt. Fortunately, $9.1 trillion of that was in home mortgages.
The bottom line is that 80% of Americans live paycheck to paycheck, 60% have less than $1,000 saved, outstanding credit card debt topped $1 trillion last year and household debt hit another record high of $13.5 trillion in 2018.
There are plenty of economists who tell us that it is normal for debt to rise in a growing economy. To them I ask, what happens in the next recession? Suffice it to say, it won’t be pretty! I’ll have more to say on this topic in the near future.
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