Earlier this Fall, we had the chance to discuss consumer debt with Andy Manthei from the Business Development team at GreenPath Financial Wellness, and Kevin Bove, a Senior Financial Advisor at HB Retirement. Andy and Kevin offered insights into current debt trends, especially in this unprecedented environment of rising interest rates and the return of student loans. They also shared strategies for American workers and HR Leaders to manage debt while saving for emergencies and retirement.
Here are 5 concepts we covered during the webinar:
- How Americans Are Taking on More Debt
- Financial Planning and its Role in Debt Management Strategy
- The Unique Nature of Each Consumer’s Financial Situation
- The Importance of Saving Money while Simultaneously Getting Out of Debt
- What can HR Leaders do to Help Employees
How Americans Are Taking on More Debt
Mortgage debt surpasses $12 Trillion
The New York Fed Consumer Credit Panel/Equifax report that mortgages constitute the majority of total debt, at approximately $12 Trillion. With auto loans, student loans, and credit card debt are rising on an upward trend.
This study also reveals an increase in auto loans, credit card, and mortgage delinquencies. Although student loan delinquencies have been muted for the past three years, they will likely surge as student loans resume in October.
A survey by Sunny Day Fund found short-term debts, like credit cards and auto loans, negatively correlate with self-reported financial wellbeing. Conversely, financial wellbeing is directly correlated with savings; the more savings an individual has, or a savings plan in place, the more financially secure they feel.
Manthei described in detail the debt trends his team is seeing amongst their clients. Manthei said, “We’ve seen year-over-year just with the people that we’re serving, and we talk to over 100,000 people a year, that from July 2022 to July 2023 the average amount of credit card debt went from $9,000 to almost $15,000 and the median amount of debt went from about $4,300 to a little over $7,000.” He also discussed the “cash flow crunch” scenario among his clients; 53% of the consumers he spoke with were within $100 of a budget deficit, meaning that extra $100 puts them “in the red” on a given month, forcing them to rely on credit cards and other forms of debt.”
Student loan debt
Manthei worries that when student loans resume October 1st, the number of clients experiencing this “cash flow crunch” will increase by 50% because, based on the data, 1 in 4 of his clients will add a payment of around $500 a month. Williams referenced a recent Wall Street Journal article which supported Manthei’s concerns, detailing how borrowers planned to cut back on retail expenses resulting in an approximate $100 billion loss in consumer spending, ultimately worrying large U.S. retailers who depend on this consumer spending.
“We’ve seen year-over-year just with the people that we’re serving, and we talk to over 100,000 people a year, that from July 2022 to July 2023 the average amount of credit card debt went from $9,000 to almost $15,000 and the median amount of debt went from about $4,300 to a little over $7,000.”
—Andy Manthei, GreenPath Financial Wellness
Debt’s impact on underrepresented populations
BIPOC populations are uniquely impacted by this debt crisis, Mathei emphasized, “we’re going to see big time impacts when we’re talking about marginalized and underserved BIPOC communities. We knew that there were issues with wealth gaps…It’s being exacerbated even further now and we’re trying to focus on how can we create new products and services that meet some of these needs, so focusing on finding ways that we might be able to, instead of necessarily tackling the credit cards, what about all those payday loans, medical bills, cash advances, and all of the things that are typically holding other people down that they may not have traditional access to such as normal banking services.”
Financial Planning and its Role in Debt Management Strategy
Bove’s team at HB Retirement has seen, firsthand, the impact of rising interest rates on their clients. “Workers are asking questions now, myself and our team of financial advisors…we’re doing thousands of meetings per year where we’re one-on-one in front of the person or in a zoom meeting and I’d say people are really feeling the effect of inflation. They’re having to consider other things such as can I continue saving for long term such as 401(k) the same way, do I need to rework what my budget looks like if I have an emergency that I need to take on debt, such as something that happens to the car or the roof… how would I do that?”
Bove emphasized that “it’s really providing some opportunities for us to partner with people and to have conversations where the advice is very different now than it was a year ago, so I think it’s a great time to be having this conversation.”
The conversation Bove is having with his clients comes at an unprecedented time, at the end of July total consumer credit card debt reached a record $1 Trillion for the first time in history. This record debt, combined with higher interest rates, is putting borrowers at risk of sinking even further into debt.
The Unique Nature of Each Consumer’s Financial Situation
All projects in life require a gameplan, and working to get out of debt is no different. Manthei employs this mindset when counseling his clients, “we have a workbook that’s available on our website that talks about the priority piece, because when you look at those student loans what a lot of people do is get that in the mail and freak out, and they say that’s what I have to pay… but what if they’re on a standard repayment plan, and they could qualify for Public Service Loan Forgiveness and one of the new SAVE plans?”
When taking out a 401(k) loan might make sense
Unique financial environments, such as the current one, require unique financial planning. Bove recently provided counsel to a client where he recommended taking a 401(k) loan to accomplish a financial goal.
“I was having a conversation with someone that works at one of our retirement plans and we were talking about some debt they were going to assume, and having them do a home equity line of credit with a non-fixed rate of 7% just didn’t feel like the right option. I, and certainly our team at HB retirement, am helping people all the time and usually the situation involves how do we contribute more into a 401(k) plan. Well, this conversation involved them having access to the money via a loan within their 401(k).”
Due to the inflationary environment, Bove’s team recommended a 401(k) loan which is a strategy that is rarely employed…yet for this client, in this environment, a 401(k) loan made the most sense.
Keeping calm and establishing a gameplan is imperative for all borrowers, and every borrower will have a different strategy based on their current situation, so it is important for borrowers not to compare themselves to others.
The importance of saving while getting out of debt
Saving money is an activity that must continue regardless of the economic environment. Now, there will be times when a consumer cannot save as much as they could during previous periods, but developing consistent savings habits should be the goal for all consumers.
Start where you are
There is never a “perfect time to save” and Bove emphasized, “There’s always going to be some level of problem, there’s always going to be something going on in the market… don’t allow the negativity of what’s going on right now, the inflation and interest rates, deter you from building wealth and saving for retirement, or paying off debt. It is about making the best decisions you can repeatedly and having that repetition is really the way.”
Bove opined that workers should not stop retirement contributions during tough economic times, rather reduce them because “this too shall pass” and workers will be in a better financial position sooner than they think.
Saving for emergencies
This same mindset must be applied to emergency savings; regardless of the amount, workers should consistently contribute to an emergency savings account to build healthy savings habits.
“There’s always going to be some level of problem, there’s always going to be something going on in the market… don’t allow the negativity of what’s going on right now, the inflation and interest rates, deter you from building wealth and saving for retirement, or paying off debt. It is about making the best decisions you can repeatedly and having that repetition is really the way.”
—Kevin Bove, HB Retirement
What can HR Leaders do to help employees
Employers and employees must realize that “we are all in this together.” Bove understands that while his firm specializes in 401(k) and retirement planning, innovative solutions outside of traditional retirement solutions, like Sunny Day Fund, specialize in handling more near-term savings goals. HR Leaders must seek out these employer-sponsored benefits and employees must not only encourage HR Leaders to pursue these benefits…but they must also utilize these benefits once implemented.
Manthei encouraged HR Leaders to “listen to the employees, don’t paint with a broad brush. One of our most active employers did some design work with their employee resource groups (ERG’s); when we looked at conversations that we had with the Black ERG versus the LGBTQ+ ERG, there are different needs that surfaced so really trying to evaluate all the different offerings from a benefit perspective is important.”
Manthei also believes that HR Leaders must have an open mind when dealing with employees having debt, “it’s not just low-income earners, we know that about a third of people who make six figures also carry credit card debt.”
As a result, HR Leaders must seek innovative solutions that satisfy the full spectrum of low- and high-income earners within their organizations.
You can watch the full webinar here.