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LearnVest's Financial Confidence Curve

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Financial Confidence Examining the U-Curve—and How We Might Improve the Confidence Trajectory 1 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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LearnVest is a program for your money. At LearnVest, our financial planners work with individuals and families representing a wide range of ages, income levels, lifestyles, and goals. We offer clients a detailed financial plan and access to a holistic program designed to help the client put the advice into action. Visit www.learnvest.com.


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Financial Confidence and the Workplace Financial stress in employees’ personal lives can 7 out of 10 workers say have significant ripple effects in the workplace, financial stress is their most including declines in productivity, focus and common cause of stress2 performance. A variety of recent studies have explored the extent and impact of financial stress In 2012, about 1 in 5 in the workplace. Studies have also looked at employees admitted they companies that have started adding financial had skipped work in the past wellness programs to their benefits package to year to deal with a financial problem2 help improve employee engagement—and, ideally, their bottom line.1 Over 60% of human resource professionals say In this whitepaper, we examine an interesting financial stress is having an trend in how people feel about their finances impact on employee work over time. While it might be assumed that performance2 financial confidence increases with time—along with wisdom and salaries—our research found 55% of employers believe the opposite. Specifically, we explore the sharp financial wellness leads to greater productivity3 decline in confidence after age 25, and how increased financial responsibility paired with 26% of small companies, 43% stagnant income growth can culminate in a crisis of of medium companies and confidence for people in their mid-30s and 40s. 46% of large companies have a financial wellness strategy By illuminating what may hinder financial in place for their employees confidence across a range of age groups, this or plan to add one in the next report can help provide a deeper understanding two years3 of how we might approach financial wellness in the US, thereby mitigating the negative effects of financial stress. 3 1 Data is from 9/1/2013–7/15/2014 and aggregate of 78,717 users. 2 Consumer Finance Protection Bureau Report, Financial Wellness at Work (August 2014), available at http://www.consumerfinance.gov/ reports/financial-wellness-at-work/ 3 Bank of America Merrill Lynch Workplace Benefits Report (December 2013), available at http://benefitplans.baml.com/ir/pages/ workplace-benefits-report.aspx Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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Contents 4 5 7 8 11 14 14 16 17 18 19 4 Introduction The confidence gap A pattern emerges A closer look at earning power Responsibility on the rise A detailed look by decade Under 25: “The young and free” 25–34: “The upwardly immobile” 35–44 “The spread thin” 45–55 “The light at the end of the tunnel” Summary and final notes Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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Introduction How do people feel about their finances? While it might be assumed that financial confidence increases with time—along with wisdom and salaries—LearnVest research found the opposite. In this paper, LearnVest looks at data from our own members, statistics from the U.S. Bureau of Labor Statistics, and several recent studies to try to answer the confidence question. Specifically, we examine the sharp decline in confidence after age 25, and how increased financial responsibility paired with stagnant income growth can culminate in a crisis of confidence for people in their mid30s and 40s. In delving into the root causes, we also begin to explore how the financial planning industry can help rewrite the confidence story. 5 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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The confidence gap Does financial confidence grow as people get older (and presumably wiser)? Our internal research involving individuals signing up for LearnVest found that new clients’ confidence in their finances actually demonstrated a U-curve. While those under 25 generally felt very confident about their finances, 30- and 40-somethings were significantly less confident. In the 55 and older brackets, confidence starts to tick up again.1 60% Confidence by age across income levels 50% 40% 30% 20% Under 25 years 25-34 years 35-44 years 45-54 years 55-64 years 65 years and older Source: LearnVest 6 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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Curious about whether income played a role in financial confidence, we then looked at confidence across income brackets. We found that the U-curve trend still holds true across most income levels. 63% of people in their 30s making between $70,000 and $100,000 annually stated they don’t feel good about their finances.2 Confidence by age within income brackets 70% 60% 50% 40% 30% 20% 10% Under $30,000 $30,000-$50,000 $50,000-$70,000 $70,000-$100,000 $100,000-$150,000 54+ 44-54 34-44 24-34 18-24 54+ 44-54 34-44 24-34 18-24 54+ 44-54 34-44 24-34 18-24 54+ 44-54 34-44 24-34 18-24 54+ 44-54 34-44 24-34 18-24 54+ 44-54 34-44 24-34 18-24 0% $150,000 and above Source: LearnVest 7 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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A pattern emerges The confidence curve we found was based on data from people who had just joined LearnVest. Our group of respondents was 65% female, from across the United States (with the heaviest concentration from the east and west coasts) and 45% are married or partnered. In order to mitigate the impact our somewhat skewed demographic had on our analysis, we explored similar research to understand the broader context of the U-curve. We discovered that the trend revealed in our own data is also in line with the work of certain behavioral economists, who have noted similar trends in researching happiness. A study out of Dartmouth College and Warwick University, for example, found that “happiness and life satisfaction are U-shaped in age...well-being reaches a minimum, other things held constant, round the age of forty.”3 Not only has this happiness curve been demonstrated by extensive data from the United States and Europe, but data from 72 countries corroborates the trend.4 (We should note that while the LearnVest data was analyzed by cohort, similar studies have found that “the U-shape seems to be unaffected by cohort influences.”5) With supporting evidence for the U-curve in the broader context and other data sets, we set out to understand what causes financial confidence to nose-dive over time. 8 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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A closer look at earning power Larger market factors aside, a person’s income generally increases as he or she gets older. People who have been in the workforce longer have more years of experience, and their salaries tend to rise along with their duties and titles. Average income over time $90,000 $75,000 $60,000 $45,000 $30,000 $15,000 $ Under 25 Years 25-34 Years 35-44 Years 45-54 Years 55-64 Years 65 Years and older Source: Pre-tax income from the BLS “Table 1300. Age of reference person: Annual expenditure means, shares, standard errors, and coefficient of variation, Consumer Expenditure Survey, 2013” 9 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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So why do people in their early twenties—a demographic that currently faces more student loan debt than previous generations before them, and who for the most part are only just entering the workforce6—still appear to be more confident about their finances than their higher-earning counterparts in their thirties and forties? A closer look at earning power over time may offer more insight. National income data shows that while a person’s income generally does increase over time, income growth rates actually decrease dramatically over time. Average income over time and income growth rate over time $90,000 120% $75,000 90% $60,000 60% $45,000 30% $30,000 0% $15,000 -30% $ -60% Under 25 Years 25-34 Years Average Income 35-44 Years 45-54 Years 55-64 Years 65 Years and older Income Growth Rate Source: Pre-tax income and growth rates from the BLS “Table 1300. Age of reference person: Annual expenditure means, shares, standard errors, and coefficient of variation, Consumer Expenditure Survey, 2013” 10 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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The average income for Americans grows an astounding 111% from the under-25 age bracket to the 25–34 bracket. After that, income growth rate slows to 33% between the 25–34 bracket to the 35–44 bracket. Income continues to slow to a mere 1% growth rate between the 35–44 age bracket and 45–54 bracket, and then hits -6% by the time people reach the 55–64 age bracket. So, while college students and recent graduates may only have an entry-level salary, their earnings are also likely to climb dramatically as they become full-fledged members of the workforce. That makes it more likely that they’ll have the cash flow to at least cover their current expenses and debt payments—keeping confidence levels high. However, as people reach their mid-30s and 40s, their salaries begin to stagnate and eventually decline by the time they hit their mid-50s and 60s7 (likely due to near-retirees leaving their positions as they prepare to retire full-time). 11 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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Responsibility on the rise Household and spending data across age brackets from the U.S. Bureau of Labor Statistics provides another key factor of the confidence equation. Just when average income growth is slowing for Americans, financial responsibilities are reaching their highest point. Average household size by age Under 25 Years 25-34 Years 35-44 Years 45-54 Years 55-64 Years 65 Years and older 2 2.8 3.4 2.7 2.1 1.8 Average mortgage payment amounts by age Under 25 Years 25-34 Years 35-44 Years 45-54 Years 55-64 Years 65 Years and older $449 $2,862 $5,078 $3,950 $3,295 $1,560 Average vehicle payment amounts by age Under 25 Years 25-34 Years 35-44 Years 45-54 Years 55-64 Years 65 Years and older $2,262 $3,641 $4,010 $3,958 $3,275 $2,133 Average yearly expenditures by age Under 25 Years 25-34 Years 35-44 Years 45-54 Years 55-64 Years 65 Years and older $30,373 $48,087 $58,784 $60,524 $55,892 $41,403 Source: U.S. Bureau of Labor Statistics, “Table 1300. Age of reference person: Annual expenditure means, shares, standard errors, and coefficient of variation, Consumer Expenditure Survey, 2013” 12 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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The data shows that average Americans are facing their biggest household size, mortgage payments, and vehicle payments in their lives just as their income growth is peaking, with low likelihood of a significant pay increase ahead. Revisiting our confidence data with these insights in mind, it’s less of a surprise that confidence starts plummeting in the mid-30s and 40s demographics. We cannot ignore the emotional toll of these factors: according to the American Psychological Association, the top causes of stress for Americans are money, work, and the economy.8 With a clear picture of their current responsibilities, looming retirement needs, and tepid outlook for significant pay increases, Americans may be facing an unpleasant—and stressful—reality check when it comes to their financial outlook. 13 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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Financial responsibilities and financial confidence by age $90,000 60% $75,000 50% $60,000 $45,000 40% $30,000 $20,000 30% $10,000 20% 0 Under 25 Years 25-34 Years Spending 35-44 Years 45-54 Years 55-64 Years 65 Years and older Confidence Source: BLS “Table 1300. Age of reference person: Annual expenditure means, shares, standard errors, and coefficient of variation, Consumer Expenditure Survey, 2013”Annual expenditure means, shares, standard errors, and coefficient of variation, Consumer Expenditure Survey, 2013” 14 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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A detailed look by decade Under 25: “The young and free” Average income: $27,941 Average percent confident: 39% Average annual vehicle payments: $2,262 Average annual mortgage payments: $449 Average household size: 2 people Average yearly expenditures: $30,373 Source: U.S. Bureau of Labor Statistics, “Table 1300. Age of reference person: Annual expenditure means, shares, standard errors, and coefficient of variation, Consumer Expenditure Survey, 2013” While earnings tend to be low, those in their early twenties also have, on average, the fewest financial responsibilities. From a financial planning perspective, that makes this an ideal time to start building a habit of saving for emergencies and retirement—though data reveals that few are. Of incoming LearnVest members, this age group is the least likely to have an emergency savings goal (16.8% of LearnVest members versus 28–30% of users in the 25–34 and 35–44 age brackets)9. Surveys show that only 43% of eligible workers under 25 participate in 401(k) plans, compared with over 70% of those over 45 years old, and that they contribute less of their income to retirement—4.3%, versus 8.7% for Americans between 55–64.10 15 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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Data from the 2012 study for the Certified Financial Planner Board of Standards, Inc. and the Consumer Federation of America also shows that only 35% of people 18–24 have any money saved for retirement, far less than the 55% of people in the 24–34 age bracket and the 66% of people in the 35–44 age bracket.11 Just because people under 25 are saving less doesn’t mean they haven’t thought about it. The same study revealed that nearly 6 in 10 of those under 25 think they’re in OK shape or can start saving for the future, far more than any other age group. 12 When we look at those under 25, it may be that we’re looking at a case of false confidence— with few current responsibilities and without a clear notion of what’s on the horizon, they may be missing out on the opportunity to establish a savings habit early, when time (and compound growth) may be the best asset they have. 16 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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Age 25-34: “The upwardly immobile” Average income: $59,002 Income growth rate from previous age bracket: 111% Average percent confident: 33% Average annual vehicle payments: $3,641 Average annual mortgage payments: $2,862 Average household size: 2.8 people Average yearly expenditures: $48,087 Source: U.S. Bureau of Labor Statistics, “Table 1300. Age of reference person: Annual expenditure means, shares, standard errors, and coefficient of variation, Consumer Expenditure Survey, 2013” The false confidence picture comes into sharper relief in the next age category, those between the ages of 25 and 34. People in this age bracket are likely experiencing (or have just experienced) the biggest income increase in their lives. And their goals, which typically start to revolve around lifestyle and building for the future, tend to expand with this increase. In fact, according to LearnVest data, savings goals for weddings, home buying, and “fun” almost double in this age bracket compared to those under 25. While retirement and emergency savings contributions also begin to ramp up at this time, they may not be at the same rate that a financial planner would advise, given the upcoming financial responsibilities, retirement contributions, and slowed income growth ahead. We see a bit of an “I’ll cross that bridge when I get to it” mentality, giving this age bracket a continued sense of false confidence. It appears that lifestyle spending—not savings—inflates with growing income. 17 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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Age 35-44: “The spread thin” Average income: $78,000 Income growth rate from previous age bracket: 33% Average percent confident: 27% Average annual vehicle payments: $4,010 Average annual mortgage payments: $5,078 Average household size: 3.4 people Average yearly expenditures: $58,784 Source: U.S. Bureau of Labor Statistics, “Table 1300. Age of reference person: Annual expenditure means, shares, standard errors, and coefficient of variation, Consumer Expenditure Survey, 2013” In this age group, income is still continuing to increase, but at a more moderate 33% growth rate versus the previous 111%. At the same time, average household size is at its highest, vehicle payments and yearly expenditures are increasing, and mortgage payments are nearly doubling. In addition, long-term goals like retirement are now competing with other goals, like college funding, and income may not be increasing enough to accommodate it all. As a result, spending on “fun” categories tends to drop back down. It’s hardly a surprise then, that as the financial responsibilities of adulthood continue to grow, and with little chance for a significant pay raises ahead, financial confidence declines to its low point here. 18 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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Age 45- 54: “The light at the end of the tunnel” Average income: $78,879 Income growth rate from previous age bracket: 1% Average percent confident: 29% Average annual vehicle payments: $3,958 Average annual mortgage payments: $3,950 Average household size: 2.7 people Average yearly expenditures: $60,524 Source: U.S. Bureau of Labor Statistics, “Table 1300. Age of reference person: Annual expenditure means, shares, standard errors, and coefficient of variation, Consumer Expenditure Survey, 2013” This age group continues to have low financial confidence—right as income increases have almost come to a halt, at an average 1% growth rate. While expenditures continue to rise slightly, the highest jump in savings goals for this group, according to LearnVest data, is in retirement and cars (perhaps bringing some validity to the mid-life crisis car-buying trope). With retirement looming, financial responsibilities still at a high point, and income growth at standstill, people in this age group are likely wondering how they’re going to make ends meet. They may need to wait another ten years or so (when it’s more likely that their mortgage will be paid off and their kids have left the house) for their income to fall in line with their responsibilities. It’s at that point (the 55+ age group) that we finally see financial confidence rise again. 19 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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Summary and final notes Just like overall happiness and well-being, our data demonstrates that financial confidence follows a U-curve. Those under 25 feel very confident before a swift confidence decline hits in their 30s and 40s. People appear to lose confidence in the face of growing financial responsibilities and stagnating income growth. The weight of these financial pressures is a leading cause of stress nationwide, so perhaps it is time to rewrite the confidence story. The data shows that in general, young people have fewer financial responsibilities and enough money to meet their current needs. We posit that, therefore, they tend to be more confident. As people get older—and perhaps feel like their income growth won’t keep pace with their financial responsibilities—they tend to be less confident. But if those confident 20-somethings had a better sense of what the next 10, 20 or 30 years might look like from a financial perspective and could better prepare, perhaps the reality check wouldn’t be so surprising. Could foresight be the confidence cure? In the aforementioned 2012 study for the Certified Financial Planner Board of Standards, Inc. and the Consumer Federation of America, researchers 20 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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found that people across age and income levels who plan financially feel more confident about their financial decision-making, save more money, and feel better about their progress to date in saving for financial goals.14 In fact, people who had a plan for either emergency savings or retirement were nearly twice as likely to feel in control over their finances. 15 If financial confidence is defined as how people feel about their money and, more specifically, how they feel about their ability to meet their financial responsibilities, then we could potentially replace the U-curve with a steady line upward by giving Americans the power of foresight and planning. By knowing what’s ahead and what it may take to meet future responsibilities, people can make financial decisions today that take both their current and future lifestyles into account. Perhaps by taking a page from the wellness industry, which has made it mainstream for people to care about both their current and future health, the financial planning industry can do the same. 21 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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Sources: 1 Confidence data is as of November 6, 2014, and run on a sample of approximately 108k people who visited LearnVest.com. 2 Ibid. 3 David G. Blanchflower and Andrew J. Oswald, “Well-Being Over Time in Britain and the USA,” 1999, http://www.brookings.edu/es/dynamics/ seminars/20000127.pdf. 4 David G. Blanchflower and Andrew J. Oswald, “Is Well-being U-Shaped over the Life Cycle?,” 2008, http://dericbownds.net/uploaded_images/ Blancheflower.pdf 5 Ibid. 6 Jason N. Houle, “A Generation Indebted: Young Adult Debt across Three Cohorts,” 2014, http://www.jnhoule.org/storage/Houle2014_GenIndebted_ final.pdf 7 “Visualizing the 2012 Distribution of Income in the U.S. by Age,” http:// politicalcalculations.blogspot.com/2013/01/visualizing-2012-distribution-ofincome.html#.VIniQlfF8hH. 8 American Psychological Association, “Stress in America Findings,” 2010, https://www.apa.org/news/press/releases/stress/2010/national-report.pdf. 9 Data as of May 9, 2014 on a sample of 11,000 users across 20,00 goals. 10 Steven Rattner, “Saving Young People From Themselves,” New York Times, April 12, 2014, SundayReview, http://www.nytimes.com/2014/04/13/opinion/ sunday/saving-young-people-from-themselves.html 11 Certified Financial Planner Board of Standards, Inc. and the Consumer Federation of America, “2012 Household Financial Planning Survey,” http:// www.consumerfed.org/pdfs/Studies.CFA-CFPBoardReport7.23.12.pdf. 12 Ibid. 13 Data as of May 9, 2014 on a sample of 11,000 users across 20,00 goals. 14 Certified Financial Planner Board of Standards, Inc. and the Consumer Federation of America, “2012 Household Financial Planning Survey,” http:// www.consumerfed.org/pdfs/Studies.CFA-CFPBoardReport7.23.12.pdf. 15 Ibid. 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. 22 Financial Confidence: Examining the U-Curve—and How We Might Improve the Confidence Trajectory


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