Financial ignorance will bite you in the ass

It’s clear that financial stress can have serious consequences on our well being.  A study from Fidelity found that stress from debt correlated to an increase in weight gain and lack of sleep.  A 2015 study by SunTrust Bank found that finances are a leading cause of stress in a relationship.  A survey done in the UK found that money worries was the leading cause of marriages falling apart.

To avoid the stress of dealing with finances, many people simply look the other way.  Is financial ignorance really bliss?  When I speak with people who do not contribute to their 401K, IRA, or savings, they often tell me that they will worry about their retirement later.  For many of these individuals, they truly believe things will somehow just magically work out.  I’ve heard many reasons (excuses) people don’t save.  I’ve said exactly the same excuses in the past.

“I’ll save for my retirement when I start earning more income.”  Lifestyle inflation often accompanies income increases.  Many can and should save at any income.  Time in the market to allow your money to compound is incredibly powerful.  Try to arrange your life and your finances in a way which your future self can thank your past self.

“The stock market is so confusing.  I need to do more research before investing.”  It’s better to start investing earlier even if you don’t know everything about investing.  Let’s face it, you will never learn everything there is to know about investing.

“I have too many bills to take care before I start investing.”  It’s definitely hard to come up with extra money if all your income is owed towards payments (auto loan, credit card bills, cable television, expensive cell phone bill, eating out regularly, etc).

“You only live once.  I want to live for today and will worry about retirement later.”  It’s certainly possible that a freak accident or medical condition can cut one’s life short.  The more likely outcome is that your life will be long, and you need to plan accordingly.

What happens if you spend your entire working career living paycheck to paycheck and ignore contributing to your future retirement?  New research has found that the people 65 and older are filing for bankruptcy at a rate of 3 times more than in 1991.  12.2% of bankruptcy filers are now 65 or older, up from 2.1% in 1991.  For older Americans who are broke and nearing retirement, bankruptcy may seem like the only option to get out of financial trouble. 

Some researchers suggest that the explosion of bankruptcies are largely due to vanishing pensions (replaced by 401K savings plans) and increased burdens on individuals to save for their own retirement during their working years.  The rising costs of health care, stagnant or declining incomes, and inadequate savings are pushing these older Americans off a financial cliff.  Many older Americans receiving Social Security checks still end up working because they don’t have enough retirement income to support their lifestyles. 

According to the Employee Benefit Research Institute, the median household led by someone 65 or older had liquid savings of $60,600 in 2016 while the bottom 25% of households only had a liquid savings of $3,260.  These individuals are barely hanging on.  A lost job or emergency health problem and this small financial cushion can be wiped out.

We are all vulnerable to live changing financial disasters like unexpected health problems, job loss, divorce, or death in the family.  I’m pretty sure most Americans, especially those that have worked all their lives, never expected the need to depend on bankruptcy just to survive.  I’m a big supporter of having a safety net to make sure people don’t starve in their old age or go bankrupt due to the insane cost of healthcare.  I’m not sure how exactly to fix the problem, but I’m sure many of us recognize that there is a problem with the current health care and Social Security system.   

I have to wonder if some of these Americans really prepared the best they could during their working years.  In 40+ years of working, was it impossible to set aside any money to reserve for the future?  Were many of these individuals just practicing financial ignorance?  Let these sad stories be a cautionary tale for those thinking that their retirement will just magically work out.  Often times, it doesn’t.  Would you rather save for your own future?  Or depend on meager government subsidies to keep your expenses covered?

We try to save and invest as much as possible to reach financial freedom as soon as possible.  Part of what motivates us is an anxiety of not being prepared for our future.  As we get older, I would hate for us to be a burden on our children or our government.  We want our children to thrive financially and not feel obligated to take care of us financially.  We don’t want them to be dragged down by our poor preparation for our own retirement.  We choose not to be ignorant of our finances.