Americans Shifting Focus from Consumer Debt to Retirement Savings

Have Americans grown comfortable enough with their financial situation to start investing in their retirement or have they just accepted that the “buy it now, pay whenever mindset” is no longer allowed? 

A new report by Manhattan Beach, Calif.-based Financial Finesse suggests both.  People fortunate enough to have a job in this economy are still under a lot of financial stress, but many are taking charge and focusing more on retirement savings than on debt reduction and budgeting, according to Financial Finesses’ Q2 2010 Research on Financial Trends.

Financial Finesse provides unbiased financial education programs to corporations, credit unions and municipalities. It serves more than 500,000 employees nationwide and its trend analysis research is compiled by tracking calls into its financial helpline.

Diane Winland, CFA, CPA and resident financial planner for Financial Finesse, told insideARM.com that when the financial crisis took hold a few years ago callers to the company’s hotline were more interested in managing cash flow and decreasing debt.  Winland said declining home equities and credit card lines, coupled with higher consumer credit interest rates and the credit card act served as the wake-up call then.

But a new trend developed towards the end of 2009 when short term financial needs began taking a back seat to long term financial goals. The latest report shows that employee calls concerning long term planning issues rose to 48 percent in the second quarter compared to 37 percent during the year ago period, while calls about debt, budgeting and saving fell from a combined 32 percent of calls from 38 percent a year earlier.  

“What might have started as a necessity has turned into a habit and that’s a good habit to have,” she said.

Some debt buyers and collection agencies may feel otherwise, fearing the trend will mean even lower future charge-offs and portfolio values. As of June 2010, total outstanding revolving debt was down more than 15 percent from its peak of $973 billion in August 2008, and it continues to decline month over month.

Kaulkin Ginsberg Director Mark Russell said debt buyers and collection agencies still could benefit from the trend through better future liquidation rates.

“The theory should hold that if consumers are becoming smarter about their financial situations, then the debtors who fall into the portfolios of charged-off debt should be more capable of paying back their debts,” Russell said.

There may already be evidence of that based on the responses from employees who used Financial Finesse’s financial education learning tools in the second quarter.  According to the report:

• 63% of employees said they have a better handle on monthly cash flow, up from 60% a year ago.
• 49% are paying off balances in full, up from 42% a year ago.
• 46% reported have an emergency fund to pay bills for a few months if they should lose their jobs, compared with 41% last year.
• 80% pay their bills on time, up from 77% a year ago.

Both Winland and Russell noted that any number of things, including a double dip recession, could lead consumers to horde income which would slow retirement investments and debt liquidations.  But Russell said some consumers are becoming more adept at stonewalling collection agencies, which can also be troublesome for the ARM industry.

“There is this cottage industry of lawyers and settlement companies who have made businesses out of inspiring debtors to not to pay their debts or to pay back a fraction of what they owe,” Russell said. "This trend has negatively impacted liquidation performance.”