The Spending Surge: Safeguarding Financial Futures in the Age of American Splurging
American consumers are on a spending tear. According to a recent Wall Street Journal (WSJ) article, even though interest rates and inflation are on the rise and most people have kissed their pandemic savings buh-bye, you’d never know it based on the increase in discretionary spending.
The WSJ reports Americans have already bought over 295 million event tickets with Ticketmaster this year—an 18% increase over the same period in 2022—and Delta Airlines had its highest revenue ever in the second quarter of 2023.
What’s driving the rush to spend, especially on “the fun stuff”? And what can your financial institution do now to minimize the negative impact that spending spree could have on your customers’ long-term financial well-being? Preventing The Spending Surge: Safeguarding Financial Futures in the Age of American Splurging is key, here are some things to consider.
Why the uptick in YOLO spending?
While previous generations might have been more inclined to prioritize long-term investments like a house, education or retirement over fun today, many no longer feel the trade-off is worth it. The following beliefs are driving that change.
- Life’s too short. The last few years have been hard. People have lost loved ones to COVID, gone long periods without seeing friends and family, and postponed or skipped big life events like proms, graduations, weddings, and funerals. They’re tired of missing out and opting to do things now that their parents or grandparents might have treated as once-in-a-lifetime happenings like an tropical vacation or a fancy car.
- I’ll never be able to afford a house. As home prices continue to tick up and interest rates remain stubbornly high, the American dream of home ownership feels increasingly out of reach. According to a recent study from real estate education platform Home Bay, 72% of renters believe they’ll never be able to afford a house. For many that means a willingness to spend on things they wouldn’t have prioritized if they were saving up for a home.
- Climate change means my dream location might not be around long. This year saw fires in Lahaina, the strongest hurricane to hit Florida in over a century, and extreme heat in much of the country. Fear they’ll miss out on a chance to visit their bucket list travel spots drives many to travel now, even if it means ignoring financial realities.
What’s the impact of this spend-a-thon?
In the short term, a live-for-today philosophy is certainly a heck of a lot more fun than patient saving. But the longer-term consequences could affect both the individual consumer and the U.S. economy overall.
- More money going to service debt. Many consumers make fun happen by running up their credit cards. Interest rate increases over the last few years mean this debt is increasingly expensive and harder to pay down. And Gen Zers are especially vulnerable to the impact of credit card debt. According to a recent New York Times (NYT) article on Gen Z debt, this demographic is paying more of their disposable income to service debt than other generations and likely will be in the future, too. One reason why? Many don’t understand the fundamentals of borrowing, like how interest works and the impact of not paying off their credit card balance each month.
- Limited funds to deal with the unexpected. You’re likely familiar with the Federal Reserve’s survey regarding consumers’ ability to deal with an unexpected $400 expense, which is seen as a measure of economic stability. Since the survey was first conducted in 2013, there had been an annual increase in the number of people who’d be able to pay that expense in cash (or its equivalent), with 2021 being the high-water mark. At that point, 68% of respondents could have covered that expense, and 32% could not have. Sadly, we’ve now reversed a 10-year trend: According to the 2022 survey released in May 2023, 37% would now lack the cash to cover that bill. It seems logical to assume that an increased tendency to spend means a decreased ability to cover unexpected costs.
- Retirement savings are dwindling. Some consumers have simply stopped contributing to their retirement accounts; others are treating them as short-term savings accounts. The WSJ article highlighted consumers who have opted to spend the money they would have contributed to retirement on travel and similar—a choice that could haunt them in the years to come. The NYT article found that although Gen Z consumers contribute to retirement accounts at a rate that’s twice that of other working Americans, 40% have taken a loan or withdrawal against these accounts. This choice, in turn, triggers taxes and penalties and erodes the compounding benefits of these accounts—consequences these consumers might not fully appreciate until it’s too late.
The impact of these individual choices could also spell big trouble in the years ahead for the U.S. economy overall. More money going to service debt means less money for everything else—and could slow consumer demand and economic growth. A lack of savings drives up the use of funding options like credit cards and payday lenders, which, again, means more money going to service debt. This 2018 Harvard Business Review article predicted high levels of poverty among the next generation of 70+ aged adults would strain social safety net programs and impact state and federal governments—and this was before the impact of COVID.
How can you help customers avoid a spend-big hangover? Educate them.
Although consumers might claim to understand the financial trade-offs of short-term spending vs. long-term savings (like buying a Taylor Swift ticket or Tahitian cruise instead of funding their retirement account), that’s not necessarily true. Many grew up in households where money, budgeting, and saving were never discussed, and 65% of Americans have no idea how much money they spent in the last month. Help them by offering financial education tools both online and face-to-face.
One invaluable resource to include in that toolkit? Financial wellness tools that give your consumers easy access to real-time credit scores and reports. Credit reports let your customers see their current and past credit activity, including payment history and the status of their credit accounts. They’re a great way to uncover everything from mistakes to identity theft, which is especially important considering that over a third of U.S. consumers have found errors on their reports (errors that might be affecting their credit profile and the rates they’re paying).
Look for a credit score solution that includes these features:
- The ability to check their score and report whenever they want, without affecting their score. There’s a clear correlation between credit monitoring and improved credit scores, so make it easy for customers to stay on top of this information. In fact, data provided by SavvyMoney showed that consumers who used credit goals increased their credit scores by an average of 24 points in six months.
- Interactive tools that let your customers experiment with different financial choices and see how they impact their scores. For instance, SavvyMoney’s refinance and purchase calculators help consumers better understand how they can save money on existing loans by refinancing or extending the term, the interest cost on a potential new loan, or how long it will take to pay off their revolving debt by just making the minimum payment each month. Understanding the hit their financial health could take because of a purchase or only paying the minimum balance on their credit card, might drive customers to rethink their spending.
- Personalized recommendations that help your customers take control of their financial well-being. SavvyMoney has found that consumers who use our tools see a 41% improvement in their credit score tier.
- Customized credit card and loan offerings. Could your financial institution offer your customer a better card or loan? The best credit score solutions will leverage their data to discover cost-cutting options, which could improve customers’ financial health.
Consumers’ attitudes around spending have changed—and there may be no going back to a “save now, spend later” mindset. Safeguarding Financial Futures in the Age of American Splurging while helping your customers understand the true impact their choices make, and you’ll show you have their well-being in mind—and might even change their behavior for the better.