Help savers navigate financial problems and potential consequences

Financial waters aren’t always easy to navigate. Some concepts may be simple to grasp, but things become more complex when it comes to investing in stocks and participating in retirement plans. This is where you, as a financial advisor or retirement plan sponsor, need to provide a guiding light and advocate for savers and investors to help steer them toward responsible financial decisions and away from ruin as best you can.

That’s why it’s important to understand who’s affected and where troubles may arise. Such financial problems can result in anything from minor inconvenience to complete disaster. People’s lives can be and have been ruined by bad financial choices. So, what should you look out for, and how can you help?

The current financial situation

According to the U.S. Census Bureau, there were 37.2 million people living in poverty as of 2020, which was an increase from the year before.¹ What’s more, the bread and butter of our country — the American middle class — is shrinking, and that’s partly because of an increase in people in the lower-income tier (making less than $52,000 per year in household income).²

On top of what’s happening now, only under a third of American workers feel very confident about their ability to afford a comfortable retirement.³ Factor in the last couple years of stress and financial struggles due to the pandemic, and we have nearly an entire country trying to gain a stronger foothold on their finances against multiple obstacles in an ever-evolving, stressful landscape.

Hard times affect almost everyone

Just about anyone can fall on hard financial times or at least encounter a few roadblocks to their financial goals, regardless of economic standing. We can look at surveys and data, but ultimately, it’s a nearly universal struggle. Whole families suffer when just one member loses a job. People experience sudden and unexpected healthcare expenses that put a massive dent in their savings — if they have any to begin with. And those are just examples of the big events; any number of small decisions at any time can make an impact one way or the other, too.

In what financial areas could certain decisions result in negative consequences?

Many financial decisions within these areas, big or small, could lead to either prosperity or ruin:

• Planning: As the saying goes, “If you fail to plan, you are planning to fail.”
• Saving: It’s important to start saving as early and as much as possible.
• Investing: Sacrifice some money now for a sturdier financial future.
• Debt: A person’s debt could be holding them back.
• Credit: Bad credit or a lack of credit history could prevent someone from getting loan approval.
• Income: It’s not always possible to control the amount of money made, but any income is better than none.
• Insurance: It costs money to have insurance — but it could cost a lot more to not have it.
• Unexpected events: Even the most robust savings accounts could be wiped out from health crises or accidents.

Possible negative consequences

Sometimes a person experiences hardship through no fault of their own. Other times, it may be due to their poor choices or lack of basic financial literacy. No matter the origin, perhaps the most obvious negative consequence is the immediate lifestyle impact. Suddenly, they may not be able to afford all their bills and might have to cancel subscriptions or important services. Worse, they may feel compelled to forgo medical care, and may need to downsize their home. They could even become homeless.

Those consequences can have a ripple effect, impacting everyone around that person, especially immediate family or significant others. Getting takeout for dinner is no longer on the table. College tuition for children may be in jeopardy, which could affect those kids for the rest of their lives — and the lives of future generations. A comfortable retirement? That may grow wings and fly into the ether of unrealized dreams.

And that’s not even taking into account the mental health of anyone who finds themselves in financial hardship. Loss of sleep over money stress can lead to physical health problems and strained relationships. Already, Americans list money as a major cause of stress. According to the American Psychological Association’s 2022 Stress in America survey, 65% of respondents rated money as a top stressor — and stress about money is at its highest since 2015.⁴

What happens when someone who’s already stressed about money takes a wrong turn and makes their financial situation worse? The results could be dire.

How you can help guide people toward financial success and away from ruin

As a financial advisor or plan sponsor, there’s only so much you can do. You aren’t an all-powerful financial sorcerer capable of shifting global markets and changing regulations or long-held mindsets. But there are still ways you can help.

Advisors can encourage individuals to start saving as much as they can. You know the common recommendation — 20% of their income if possible. Educate them about the market and making wise investments. Be sure that you are well-versed in markets, as well as inflation and other economic factors, so you can impart reliable knowledge.

Plan sponsors should do as much as possible to encourage individuals to participate in retirement plans, and help make plan details easy to understand so everyone knows why putting away some of their paycheck toward a 401(k) now will pay off in the future.

Incorporate the financial areas listed above — planning, saving, investing, debt, credit, income and unexpected events. Help them get started on a plan. Advise them on savings account best practices. Demonstrate the benefits of investing wisely. Show them how debt affects their lives and how they can pay it off quicker. Discuss responsible credit utilization. Talk about how much of an income they need to fund their desired lifestyle. Encourage them to have a safety net for unexpected events.

Throughout the whole process, be sensitive. Those looking to save or invest more may not be as familiar with financial concepts as you are, for any number of reasons. If someone has made a poor financial decision, rather than wagging a finger at them, explain with kindness and compassion what went wrong and why — and how they might do better next time.

SOURCES
¹United States Census Bureau, National Poverty in America Awareness Month, January 2022
²Pew Research Center, How the American middle class has changed in the past five decades, April 20, 2022
³EBRI, 2022 Retirement Confidence Survey (RCS), 2022 RCS Fact Sheet #3 Preparing for Retirement in America, 2022
⁴American Psychological Association, Stress in America, 2022 

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