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Financial Preparedness Scorecard: How Many Boxes Can You Check?
Many Americans are failing to meet their financial goals, and as a result are (understandably) anxious about their long-term financial security.
A recent report from financial services provider Primerica found that few Americans engage in the fundamental behaviors required to lay the groundwork for “financial preparedness.”
Primerica measured long-term financial preparedness of Americans using what it calls a Financial Security Scorecard, grading survey participants on whether they engage in the following habits:
- Making more than the minimum payment on credit card bills every month.
- Having $50,000 or more in life insurance coverage.
- Saving every month, regardless of amount.
- Investing some of their savings in accounts other than cash.
- Having enough savings to cover three months of expenses if the primary breadwinner lost his or her job.
These are pretty basic steps toward financial wellness. But startlingly, close to half of those who participated in the Primerica survey (43%) reported engaging in only two or fewer of the five financial fundamentals. That’s worth repeating: Two. Or fewer.
We clearly need to get our financial act together, America.
There is some good news contained in the report. Americans want to learn more about saving, budgeting, and investing in order to more adequately protect their families.
With that in mind, here’s a closer look at each of the financial preparedness fundamentals outlined on the scorecard.
1. Making More Than the Minimum Payment on Credit Cards
Michelle Clark, a certified financial wellness consultant and founder of Shake Your Money Tree, likes to point out to clients that debt is the root of all stress. And credit card debt is one of the biggest culprits.
“The first reason for paying as much as you can on a credit card balance each month is to avoid paying interest on the balance, because interest keeps accruing and is made even worse by additional purchases, which causes people to feel like they can never get ahead of the curve,” says Clark.
Indeed, a recent report from Bankrate found that 74 million Americans have more credit card debt than emergency savings, which is the highest that figure has been in nine years.
Justin Ehrhardt, a financial professional with World Financial Group who focuses on educating families about basic financial fundamentals, says even if you’re on a tight budget, it’s important to pay a little bit extra each month on credit card bills.
“Even simply adding $5 to a monthly amount above the minimum can drastically change the length of time you will be paying off the card,” said Ehrhardt. “When it comes to your credit card bill, paying the minimum on your bill will predominantly pay for the interest accumulated each month. For example, a person may have a $500 credit card bill and their interest for that month could have accumulated up to $20. If your minimum payment is $25, you’re mainly paying $20 for interest and only $5 to the principal.”
Credit card companies, continued Ehrhardt, want you to make minimum payments because it keeps you in debt longer, which in turn means more profit for the bank in the form of interest payments.
For consumers who insist on continuing to use credit cards, Clark suggests putting a halt to the accumulation of additional debt by immediately deducting the money for any new purchases on the credit card from your checking account register.
“That way the money is ‘virtually’ set aside in their checking account,” Clark explained. “By the time the credit card bill rolls in, they have the money to pay off those charges in full.”
- Read more: 74 Million Americans Have More Credit Card Debt Than Emergency Savings: What to Do If You’re One of Them
2. Having $50,000 or More in Life Insurance Coverage
Obtaining $50,000 or more in life insurance coverage is a relatively simple task to accomplish, yet one that’s often overlooked, says John Holloway, of the insurance site NoExam.com.
“Many people put off buying life insurance, claiming that it’s too expensive,” Holloway explained. “The average cost of a 20-year term $100,000 life insurance policy for someone at age 30 is roughly $10 per month. It’s certainly affordable.”
Too often, however, people get caught up in what they perceive to be the complexities of buying insurance, mired in finding the perfect coverage amount, term length, and company until they just throw up their hands and put it off until later, continued Holloway.
With the average cost of a funeral being about $9,000, even a simple, minimal policy can help your family at a difficult time when they don’t need added worries, said Holloway.
“We’re not talking about a million-dollar policy, just a small term policy to cover final expenses,” said Holloway. “It’s a no brainer.”
Chris Mason, senior vice president of sales distribution for HealthMarkets describes a life insurance policy as a necessity.
“The death benefits from life insurance are often used to pay for burial and final expenses, replace income of the individual who has passed, or to pay off a mortgage,” explained Mason. “If you leave behind a spouse, children, or other loved ones, life insurance policies can help alleviate any financial burdens when coping with the loss of a loved one.”
3. Saving Every Month, Regardless of Amount
This is one of the most important concepts people need to learn, says Ehrhardt, of World Financial Group. Even if you’re living on a bare bones budget, saving just $10 a month will help you develop this habit.
“If you’re not able to save even $10 a month and build that habit, then when you free up your income, either by paying off debt or maybe a promotion at work, you will not have the habit of saving small, so you will not be able to save big,” suggested Ehrhardt. “Even if someone is living relatively close to paycheck-to-paycheck, I guarantee you they can find $5 a month to apply towards their debt and $10 a month to save.”
“Considering the challenges faced by our Social Security system, a higher average life expectancy, increased health challenges for the elderly, and inflationary trends, it’s more important than ever for Americans to begin saving for their future,” said Knutson. “When you get into the habit of gradually and steadily setting aside money each month, you’ll be surprised how much it adds up over time allowing you peace of mind when life’s uncertainties inevitably occur.”
4. Investing Money in Accounts Outside Traditional Savings
Investing is an important part of your overall financial plan if you want to accumulate money more rapidly than one would in a traditional savings account, says Michael Gerstman, CEO of Dallas-based retirement planning firm Gerstman Financial Group.
It’s good idea to earmark some of your savings dollars to be put into equity markets, such as mutual or index funds, Gerstman explained, to create the potential for higher returns on your money. That can be as simple as contributing to your 401(k) at work, or opening up an IRA or Roth IRA on your own.
“If the time horizon is 10 years or longer before the funds are needed, you could put as much as 75% of savings into the equity markets,” said Gerstman. “While it’s true that these monies may experience volatility, over time you could expect the return to be significantly higher than a traditional savings account. While most savings accounts today pay less than 2%, in the equity markets, it would be realistic to expect a 6% to 7% annual average return over a decade or more.”
- Read more: How to Start Investing on a Tight Budget
5. Savings to Cover Three Months of Expenses
One final fundamental to keep in mind: Having at least three months of expenses saved for emergencies is something financial advisors say is critical to overall financial well-being. Here’s why.
“In the event of an emergency–like the loss of income, accident, or family crisis–this pad of ready cash gives you time, and time gives you options,” said Byron Tully, author of the book Old Money, New Woman. “If you lose your job unexpectedly on Friday, having the rent and groceries covered for the next three months means you can begin your job search with a (fairly) level head and clear mind.”
In addition, having an emergency fund means you can conduct a job search without being forced to take the first offer that comes along, and instead wait for the right opportunity based on your background, experience, and career goals.
“You can handle it emotionally because you can handle it financially,” continued Tully. “It may be stressful, but it won’t be disastrous.”
An emergency fund is not just important when a breadwinner loses a job, adds Ehrhardt. It could, and should, be used for other life emergencies, such as when a major appliance breaks down, or a medical bill needs to be paid.
It’s better to dip into an emergency fund when the car engine needs to be repaired, for instance, than to put the expense on a credit card and likely increase your long-term financial problems.
So how do you stack up three months of emergency fund money? Tully’s advice is to be consistent, be aware, and be patient.
To get started, find smaller expenses that aren’t necessities and trim them, he said. If you’re hitting Starbucks every day for a $4 coffee, back off on weekdays, pocket the $20 for that week and — crucially — put it toward your emergency fund before you spend it somewhere else.
“Enjoy your coffee when you have more time to relax – on Saturday and Sunday. You haven’t deprived yourself, you’ve simply adjusted to achieve a goal,” said Tully.
While you’re at it, try to temporarily avoid shopping malls, restaurants, bars, and movie theaters until you have your emergency fund in place, adds Tully.
None of these expenditures are essential, and each has an easy and less expensive counterpart, such as secondhand stores, farmers markets, backyard cookouts, and Netflix, he said.
Looking for still more ways to get that emergency fund off the ground? Try cleaning house and selling things you don’t use, need, or want anymore. Sell what you can at a garage sale or online, and donate what’s left to charity. Mentally, this is bringing you into a more efficient, less cluttered state of mind, said Tully.
So, How Prepared Are You?
How many boxes can you check on this “financial fundamentals” scorecard? Which ones do you need to keep working toward?
It all starts with spending less money than you earn, and putting the extra money to good use. Here are some more resources and reading to help you do just that:
- 40 Ways to Save Money on Monthly Expenses
- The Magic Math of Paying Yourself First
- 10 Little Lifestyle Tweaks and How Much Money They Save
- How to Save Money: 100 Great Tips to Get You Started
Mia Taylor is an award-winning journalist with more than two decades of experience. She has worked for some of the nation’s best-known news organizations, including the Atlanta Journal-Constitution and the San Diego Union-Tribune.