If a middle class household could not come up with $400 in a pinch, can they really be considered middle class? That is one of the questions asked in a new piece in The Atlantic about how the middle class is facing financial stress. It comes from the following fact.
The Fed asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all. Four hundred dollars! Who knew?
Well, I knew. I knew because I am in that 47 percent.
The author goes on to recount his personal financial struggles and uses that as a way to discuss the larger societal currents that are facing people when it comes to personal finance. The article brings out more evidence that the middle class continues to shrink.
Median net worth has declined steeply in the past generation—down 85.3 percent from 1983 to 2013 for the bottom income quintile, down 63.5 percent for the second-lowest quintile, and down 25.8 percent for the third, or middle, quintile. According to research funded by the Russell Sage Foundation, the inflation-adjusted net worth of the typical household, one at the median point of wealth distribution, was $87,992 in 2003. By 2013, it had declined to $54,500, a 38 percent drop. And though the bursting of the housing bubble in 2008 certainly contributed to the drop, the decline for the lower quintiles began long before the recession—as early as the mid-1980s, Wolff says.
Neal Gabler, the author of the essay, attributes this growing problem to the increasing complexity of personal finance options and the illiteracy of average Americans when it comes to finances. When that is combined with shrinking real incomes and a desire to continue spending to maintain or achieve a particular lifestyle, people become mired in a financial quicksand that can span generations.
The financial services industry needs to sit up and take notice of this data and this essay. It represents both a warning and an opportunity for providers.
The warning is that the number of eligible customers is shrinking and the number of potentially good customers is also shrinking. If people’s net worth and income continues to shrink, then lenders and depository institutions might find themselves short of customers.
The opportunity is that financial institutions and service providers can help customers and potential customers dig themselves out of this quick sand. With appropriate budgeting, spending, savings, and borrowing tools, financial institutions can build the kinds of the customers that they want. Mercator Advisory Group has laid out a strategy for its members around how this might be accomplished in the report: The Six Million Dollar Customer: Using Technology to Build a Profitable Customer Base. That report can be found here:
Mercator has done additional research around customer building and will be publishing additional reports on the how and why of building a profitable customer base by engaging customers.
Overview by Ben Jackson, Director, Prepaid Advisory Service at Mercator Advisory Group
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