The Financial Confidence Crisis (and How We Might Solve It)

The Financial Confidence Crisis (and How We Might Solve It)

In a perfect world, becoming financially independent might look something like this: College graduates enter the real world, bright-eyed and bushy-tailed—but due to student loan debt and meager salaries, they’re a little confused about their finances.

As time goes on, however, they gain wisdom, and earn heftier paychecks. Eventually, they become confident adults who can navigate the corporate ladder, cocktail party conversations—and their cash.

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You know where we’re going with this, right? Yes, it’s a far cry from real life. And it’s not just anecdotal.

Based on recent research compiled on clients entering the LearnVest program, we found that people’s financial confidence is actually rather high in their 20s—and then takes a big nosedive. (1)

graph 1

Running the Numbers

Curious to find out why, we dug deeper into the numbers, tracked it with data from the U.S. Bureau of Labor Statistics, and found two major forces contributing to the financial confidence crisis.

For one, although a person’s income generally does increase over time, income growth rates actually decrease dramatically over time. The average income for Americans grows an astounding 111% from the under-25 set to the 25–34 bracket.

But after that, the income growth rate dips to 33% from the 25–34 bracket to the 35–44 set—and hits a mere 1% growth rate from the 35–44 age bracket and those 45–54.

What’s more, just when average income growth is generally slowing for Americans, financial responsibilities are reaching their highest point. Household size, mortgages, and vehicle payments all peak for the 35–44 set.

graph 2

The Power of Financial Foresight

So what will it take to help minimize the effects of the convergence of declining income growth and increasing financial responsibilities?

Here’s one solution: foresight.

If those confident 20-somethings had a better sense of what the next 10, 20 or 30 years might look like financially—and were better prepared—perhaps the reality wouldn’t be so severe. Actually, there’s research that proves that theory.

A study by the CFP Board found that people across age and income levels who adopt a financial plan feel more confident about their money decision-making skills, save more, and feel better about the progress they’ve made on their financial goals.

In fact, according to the same study, those who had a plan for either emergency savings or retirement were significantly more likely to feel in control over their finances—50% compared to just 32%.

Bottom line: By knowing what’s ahead, people can make financial decisions today that safeguard both their current and future money lives—and nudge that financial confidence U-curve upward.

(1) Confidence data is as of November 6, 2014, and based on responses to a survey of approximately 108,000 people who visited LearnVest.com.

LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment advice. Please consult a financial adviser for advice specific to your financial situation. LearnVest Planning Services and any third-parties listed, discussed, identified or otherwise appearing herein are separate and unaffiliated and are not responsible for each other’s products, services or policies.

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