Empowering Financial Health During Uncertain Economic Times

Historically high inflation is creating barriers to achieving financial health today, as the prospect of continued price increases and an uncertain economy dampen people’s optimism for the future.

That’s the headline from AARP’s Financial Security Trend Survey– a new semiannual survey of adults ages 30+ most recently fielded in July.

The uneasiness people feel about their finances is not surprising. However, an important insight found deeper within the study is that having savings, whether for emergencies or retirement, and maintaining a manageable amount of debt are key to financial health.

But how do people build such savings or pay down debt? Individuals make it happen, but government, employers, and other groups can all play an important role in helping people take control of their financial lives, even in uncertain times.

We’ll look at some of the roles those groups can play, but first let’s examine more closely the AARP research to gain more insight into the nature of the challenge.

Trending in the Wrong Direction

One in three people said in July their financial situation was worse than a year earlier. That’s an 11-point increase compared with January (22% to 33%), when AARP first fielded the survey. This drop in financial health over a six-month period is a worrisome trend. Moreover, about 17% expected their financial situation to decline over the next 12 months, up from 12% in January, including one in five adults (21%) age 50+.

The most common reasons people cited for their worsened financial situation included higher expenses (65%) and investment-value declines (36%), mirroring broader-economy dynamics.

Keys to Financial Health: Savings and Manageable Debt

The AARP report found a strong correlation between feeling financially secure and having some cash set aside and a level of debt low enough to manage. Adults 30+ who rated their financial situation as excellent or good were 2½ times more likely to have emergency savings (86% vs 34%) than those who rated it as fair or poor. Further, those feeling financially secure were 1.7 times more likely to have retirement savings (93% vs 56%) and twice as likely to have no debt or a manageable amount (85% vs 42%) compared with those who felt financially insecure.

Paying down debt can have a direct effect on financial health, but also an indirect effect by removing barriers to saving. Roughly two in five people cited debt as a major reason for not saving more for emergencies and retirement.

People’s perceptions of their financial health go beyond the values on their household balance sheets. Money has both an emotional and psychological component. Not only do higher savings and lower debt lead to a stronger household balance sheet, but they also address two major financial worries: having enough money to be financially secure in retirement (68% were somewhat or very worried) and to handle a large, unexpected expense (62% were somewhat or very worried).

While various factors (e.g., income and the broader economy) drive the ability to save or pay off debt, systems and tools that give people greater control over their finances can improve their balance sheets and sense of financial health.

Overcoming Financial-Health Barriers

Governments, employers, and other groups all have important roles to play in empowering individuals to take control of their finances and improving their financial health, particularly around the key areas identified in the AARP report. Here are some examples.

Retirement savings at work. Access to a payroll-deduction retirement savings program at work is key to increasing retirement savings and economic security in retirement. Yet about 57 million private sector workers ages 18–64 do not have access to one.

Several states are stepping up to help fill this void through public-private partnerships that gives workers without retirement plans at work access to payroll deduction retirement savings. In the early-adopter states of California, Illinois, and Oregon, workers have accumulated more than half a billion dollars in new retirement savings.

Workplace-driven emergency savings. Employers are becoming increasingly interested in providing their workers with financial wellness programs. One area of focus is on helping workers build emergency savings. This interest likely reflects a new recognition that a worker’s ability to handle a financial emergency affects their productivity at work and growing evidence that short-term financial stability affects long-term financial health. A relatively new initiative of private and nonprofit partners is helping to move that work forward, including identifying the most effective models to help people build emergency savings.

Empowering tools and know-how. Nonprofits and the private sector can help by creating resources and tools that do more than educate; they drive people to act. For some people, finances are intimidating, while others don’t know where to start and still others have trouble sticking to a plan. Helping people overcome these challenges is core to improving financial health and that’s why it’s an AARP focus. It’s also why we created AARP Money Map, which provides users with individualized action plans for saving, paying down debt, managing unplanned expenses and more.

A Simple Concept

Regardless of inflation rates and the current economic environment, what people want does not change. They want to save for the future and pay down debt. They’re on the right track with those desires because as the Financial Security Trend Survey shows, those are the key components to improving financial health. The important role of policy – both public and private – is to help make it easier for people to do so and to succeed. This simple but important concept is even more relevant in the current environment.