By Jonnelle Marte
The Washington Post
Americans have a long way to go when it comes to managing money.
A report from the financial literacy center at Champlain College assesses the big picture when it comes to Americans’ financial behaviors. The results are pretty dismal.
Americans are struggling to stick with basic and healthy financial habits, said John Pelletier, director of the financial literacy center. Here are some key areas in which Americans may be making costly mistakes:
Not paying their bills on time. About one in five people has been more than 60 days late in paying mortgage, credit card or other bills tracked on credit reports, according to the study. (Researchers looked at a year’s worth of credit data from 2014.) Failure to keep up with bills can have implications for other aspects of your finances. Payment history is the No. 1 factor that goes into calculating your credit score. So if you stumble, focus rebuilding a positive track record by paying your bills on time — every bill, every month.
Carrying too much credit card debt. Some 63 percent of U.S. consumers use more than 30 percent of their revolving credit. The so-called “credit utilization” ratio, or the share of available credit a person is using, is the second most important factor that goes into determining their credit score. People expecting to apply for a mortgage or auto loan should prepare at least six months in advance by reducing the debt load on each card.
The best approach is to pay the card off in full each month in order to avoid interest charges. If you can’t do that, keeping the balance to below 30 percent of the total available credit can give lenders the impression that you’re a responsible borrower.
Spending too much on housing. About 31 percent of U.S. homeowners were spending at least 30 percent of their income on monthly housing costs in 2014, according to the report. Among renters, 51 percent of them spent at least 30 percent of pay on housing costs that year.
A rule of thumb is to spend no more than a third of your take-home pay on housing to leave room for other goals, such as paying down debt, saving and investing. In some areas, a shortage of affordable rental units makes it difficult for households to control housing costs. But any effort to reduce what is typically the largest monthly expense can go a long way.
Living outside your means. Sixty percent of households said they spend more than their annual income. About 60 percent of consumers could not come up with $2,000 to cover an emergency, and half of adults said they have no emergency savings at all, according to the survey. That lack of cash can force consumers to turn to more costly options such as payday loans. “If you don’t have an emergency fund, it can put you in a horrible cycle that can be hard to get out of,” Pelletier said.
Tapping their retirement accounts early. About 10.5 percent of Americans said they have taken a hardship withdrawal from their retirement accounts. Some methods of accessing retirement funds, such as loans, need to be paid back with interest. But the move can still slow savers.
It doesn’t help that many workers are not saving enough as it is. Some 54 percent of workers have less than $25,000 saved for retirement, according to the Employee Benefit Research Institute. About a quarter of workers have less than $1,000 saved. Once those savings run out, retirees will probably be left to rely on Social Security benefits, which may not bring in enough income for many households, Pelletier said.
— Washington Post
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