The LearnVest Personal Finance Review

The LearnVest Personal Finance Review Financial Goals of 2015 The LearnVest Personal Finance Review examines and explores how people nationwide approach their money. 1

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Contents 4 5 10 13 15 17 19 Introduction Budgeter Nation The Gender Divide Dare to Dream Family First Speed Bumps Summary and Final Notes 3

Introduction At LearnVest, we firmly believe that in financial planning, order matters. When it comes to the American wallet, there are countless competing priorities. As households nationwide figure out how to make the most of their dollars, they must decide how to prioritize. From paying down credit card debt to saving for retirement to buying a home, where do they start? In this annual report, LearnVest looks into the data of over 100,000 members 1, alongside current external research, to address the question: What financial goals are people putting first? By answering this question, we identify what consumers are getting right and where there is room for education to build a more financially secure nation. 4

Budgeter Nation We looked at the profiles of over 100,000 individuals signing up for LearnVest from April to October of 2015. Across key demographic cuts age, gender, geography we found a consistent trend: budgeting was the top financial goal, capturing 32% of total responses. Though a budget is an essential tool in the financial planning process, the majority of Americans (60%) do not currently have one, according to the National Foundation for Credit Counseling. 2 Perhaps the opacity surrounding budgeting can be attributed to a lack of financial literacy education in schools. In a 2015 U.S. Bank report on college students, nearly half of respondents did not know how to create or maintain a budget. 3 At LearnVest, we recognize that while budgeting may not be a goal in and of itself, it is a mechanism for establishing accountability and a path toward achieving larger goals. We consider it a positive indicator that consumers across the country actively recognize that budgeting is a tool worth pursuing. 5

PERCENTAGE OF USERS WHO CHOSE BUDGETING AS TOP GOAL, STATE BY STATE < 20% 20-25% 25-30% 30-35% 35%+ PERCENTAGE OF USERS WHO CHOSE BUDGETING AS TOP GOAL, BY AGE AND GENDER 40% 35% Male Female 30% 25% 20% 15% 10% 5% 0% 18-24 25-34 35-44 45-54 55+ 6

An Accountable Budget In addition to asking What is your first financial priority?, we asked What do you think a Planner could most help you with? Those who responded Build better spending habits and Organize my finances were most likely to select budgeting as their top priority. Indeed, better money habits and smarter financial organization are the desired payoffs of an effective budgeting strategy. This may suggest that consumers understand the benefits of a budget but also recognize that a qualified advisor is central to helping put a smart budget into action. Accountability is an important component of a healthy budget, and one way to achieve that is by working with a financial planner. TOP GOALS FOR USERS WHO RESPONDED BUILD BETTER SPENDING HABITS OR ORGANIZE MY FINANCES 38% 24% 14% 10% 4% 8% 3% Budgeting Credit Card Debt Saving for a Major Expense Student Loans Other Retirement Investing 7

Budgeting and Credit Card Debt With the average indebted American household carrying over $16,000 in credit card debt, 4 it is no question that credit card debt is a major cause of financial stress. Credit card debt was second only to budgeting as a top priority for respondents, capturing approximately 22% of those considered in this report. The takeaway: LearnVest data shows that budgeting is the top financial priority even surpassing tackling credit card debt across demographic segments. Even small amounts of debt can have a long-lasting negative effect. Take for example a $1,000 credit card balance. Assuming a 2% minimum payment and a 19% interest rate, it will take nearly 14 years to pay off and result in almost $1,700 in interest payments alone. 5 And yet, despite the burden of credit card debt which has been linked to stress, depression and anxiety 6 people often prioritize budgeting over paying down credit card debt. This finding implies that people are starting with actionable solutions to their financial problems, instead of dwelling on the issue itself. While they could focus only on a singular pain point, they are choosing to start by employing a tool that allows for holistic improvements. 8

Budgeting can be a direct solution for credit card debt, as we find that credit card debt arises for one of two reasons. The first: Someone is hit with an emergency such as job loss, medical or dental costs, and car or home repairs but does not have the funds to cover it. According to the Federal Reserve s 2015 Report on the Economic Well-Being of U.S. Households, 47% of respondents do not have $400 available in cash to cover an unexpected expense. 7 The second: someone does not have a budget in place and simply spends more than he or she earns. Both situations can be rectified with a budget. A budget helps people to establish an emergency fund to cover unexpected expenses as well as control the flow of money in and out. 9

The Gender Divide As we looked at the prioritization of goals across different segments, a clear trend became evident: men are five times more likely than women to choose investing as their top goal no matter their age. PERCENTAGE OF USERS WHO SELECTED INVESTING AS TOP GOAL, BY AGE AND GENDER 18% 16% 14% Male Female 12% 10% 8% 6% 4% 2% 0% 18-24 25-34 35-44 45-54 55+ 10

Countless studies point to men having higher confidence when it comes to personal finance. A LearnVest study found that 45% of men reported feeling financially confident, compared to only 27% of women. 8 With investing specifically, a 2014 report from Merrill Lynch reported that when presented with the statement I know less than the average investor about financial markets and investing in general, 55% of women agreed or strongly agreed, compared with just 27% of the men. 9 The takeaway: Men are dramatically more likely to select investing as their top financial priority, with a desired result of growing their net worth. Despite the inclination of men to prioritize investing, we believe that investing is not a goal most households are ready to pursue outside of their retirement accounts. While investing can be used to help grow wealth, it can carry inherent risk. Given the volatility of the stock market, it can be a dangerous place to hold funds a household may need to access at any moment (even if the stock market is in the middle of a slump). Instead of viewing investing as a goal, we think of it as a tool that can be used to help grow wealth once a financial foundation has been established. A financial foundation includes emergency savings, paying down credit card debt, and saving for retirement. Consider the current situation: the aforementioned fact that 47% of surveyed Americans could not cover an unexpected $400 expense; 10 that the average indebted American household has over $16,000 in credit card debt; 11 and that 31% of Americans have no retirement savings or pension. 12 With this landscape in mind, it quickly becomes apparent that investing should not be the recommended first priority for the vast majority of those still working on the essentials. 11

Yet, the financial services industry is currently set up to serve investing needs with a cool $1.9 billion invested into investing-focused financial companies in 2015 alone. 13 But the real need actually resides in financial planning particularly when you look to the desired outcome of investing. Those who selected investing as their top financial goal were most likely to choose Grow my net worth as their desired outcome of working with a planner. Net worth calculated by assets less debts is what a holistic financial plan aims to build, and perhaps more importantly, protect (with insurance, etc.). 12

Dare to Dream In LearnVest s 2015 Confidence Report, we identified the trend of the confidence U-Curve. 14 Essentially, those under 25 generally felt very confident about their finances, while 30- and 40-somethings were significantly less confident. Once respondents hit age 55, confidence starts to tick up again. The heightened level of confidence around money for 20-somethings can perhaps be explained by the fact that young people tend to have fewer financial responsibilities and enough money to meet their current needs. They also may expect their salaries to continue increasing at a rapid pace. Whatever the reason for their confidence, 20-somethings were the most likely age bracket in our current study to prioritize saving for a major expense, which we clarify to include things like travel, education, or buying a house. While most 20-somethings have not had the advantage of time to reach other goals or at least those that we would argue are most pressing, like paying down credit card debt and starting to save for retirement they appear to be more focused on the aspirational side of financial planning. They are eager to prioritize reaching for these major expenses, even if they know it may take a while to get there. 13

PERCENTAGE OF USERS WHO SELECTED SAVING FOR A MAJOR EXPENSE AS TOP GOAL, BY AGE 25% 20% 15% 10% 5% The takeaway: In line with the confidence U-curve around money, 20-somethings are most likely to prioritize aspirational goals, since they are not yet feeling urgency around credit card debt or retirement savings. 0% 18-24 25-34 35-44 45-54 55+ So why do older age brackets not prioritize major expenses in equal measure? The data shows that it is later in life when the pull of more daunting goals, like credit card debt and retirement, take the place of more aspirational ones, like saving for a major expense. There simply are not enough funds left to put toward anything outside of the financial foundation. TOP PRIORITIES FOR 20-SOMETHINGS VS. 30-SOMETHINGS Budgeting Credit Card Debt Investing Other Retirement Saving for a Major Expense Ages 0-24 25-34 35-44 Student Loans 0% 5% 10%1 5% 20% 25% 30% 35% 40% 14

Family First When it comes to money, the oft-used expression having children changes everything rings true. Households with children had a higher propensity to select budgeting as their top financial priority compared to households without children. Those with children were 45% more likely to select budgeting as their top goal. Certainly, a growing family can come with increased demands on a paycheck from the rising costs of groceries to 529 contributions for college. An achievable budget can be a powerful tool in helping streamline a family s cash flow to make sure they are putting their dollars toward the goals that matter most to them. As with all financial choices, this prioritization comes at a cost. For this segment of respondents, the increased focus on budgeting results in a decreased focus on investing and retirement. Cost of Having Children According to the U.S. Department of Agriculture, the cost of raising a child born in 2014 from birth to age 18 is $245,000 for a middle-income family. 15 Here s how that breaks down: Housing and Transportation: $107,970 Child care & Education: $44,400 Food: $39,060 Clothing & Misc: $33,780 Health Care: $20,130 22% 28% 22% 8% No Kids 4% With Kids 40% 7% 7% 16% 12% 10% 6% 12% 6% Budgeting Student Loans Saving for a Major Expense Retirement Other Credit Card Debt Investing 15

This fact hints at an all-too-common trend of parents delaying their own financial well-being (represented here by retirement). Our perspective is similar to the advice one might receive on an airplane: put on your own safety mask before assisting others. When faced with a 401K contribution versus a 529 contribution, many parents choose the latter. But while parents can borrow for their children s education, they cannot borrow for retirement. Plus, if they are inadequately prepared for retirement, that financial burden may fall to their children and put their children s financial security at risk down the line. A recent survey found that 62% of respondents say the cost of caring for a parent has halted their ability to plan for their own financial future. 16 The takeaway: Respondents who have children are more likely to prioritize budgeting potentially at the risk of goals like retirement and investing. That said, the fact that parents are prioritizing budgeting above other financial goals does not absolutely suggest an ineffective financial planning strategy. Indeed, budgeting is a strong starting point for building financial security for a family. Plus, retirement can and should be accounted for in a solid budget. 16

Speed Bumps As this report examines which goals people are prioritizing based on their life circumstances, we must also recognize that the interaction between life and goals is a two-way street. In other words, we have taken a look at how life affects goals; now, we will take a brief look at how goals can affect one s life. The takeaway: Those who prioritized student loans were less likely to have children, which could imply that financial burdens are causing households to delay other key milestones. An interesting correlation that appeared in this study was the fact that respondents with children were less likely to name paying off student loans as a goal. And on the flip side, those who cited paying off student loans as a top priority were less likely to have children. TOP PRIORITIES FOR USERS WITH & WITHOUT CHILDREN Investing Credit Card Debt With Children No Children Other Retirement Saving for a Major Expense Student Loans Budgeting 0% 10% 20% 30% 40% 50% 17

There are a few assumptions that could be drawn from this finding. First, as previously discussed, those with children are more likely to prioritize budgeting over retirement or investing. In the same vein, the financial obligation of repaying one s own student loans takes a back seat to budgeting for immediate family needs. Second, and perhaps most interestingly, could it be that the burden of student loan debt is actually causing people to delay having children? A 2013 survey conducted by the American Student Assistance (ASA) found that 43% of respondents had delayed their decision to start a family due to student loan debt. 17 Indeed, there is as much as $1 trillion in outstanding student loan debt in the United States, and the average student loan balance has increased by 74% over the past ten years. 18 The goal prioritization reported to LearnVest suggests that this theory of families delayed by student loans is a distinct possibility. The road to achieving financial goals is not without its challenges, which is why a solid financial plan must take into account the uncertainties of one s life financial and otherwise. 18

Summary and Final Notes Amidst the many goals households nationwide are working on, this report considers which goals are rising to the top. In the process, we found a few key things: that budgeting is the top goal across segments; that men are exceedingly more likely to prioritize investing; that 20-somethings value saving for major expenses; and that parents may be putting their family s needs ahead of their own. At LearnVest, we view financial planning as a holistic pursuit. The challenge and what we have developed over the years is creating a financial plan that effectively helps clients balance their goals. As part of that process, prioritization and trade-offs are often inevitable. As we take a closer look at what respondents defined as their first financial priority, we must acknowledge that first is not synonymous with only. Of course, respondents had other financial goals that they want and need to address. Therefore, the question at the core of our report can be a helpful proxy for addressing which financial issues cause people to take action. We already know that money is the leading cause of stress and an area of their lives consumers have resolved to improve, so which goal is pressing enough that it surfaces to the top of the list? When it comes to personal finance, inaction can pose a serious risk. By better understanding the motivations of households across the country, we can leverage that understanding to provide a strong solution and in turn, a financially stronger nation. 19

Sources: 1 This report is based on data from 101,550 people who joined LearnVest between April and October 2015. Our group of respondents was 69% female, from across the United States. 2 The 2015 Consumer Financial Literacy Survey. https://www.nfcc.org/wp-content/uploads/2015/04/nfcc_2015_ Financial_Literacy_Survey_FINAL.pdf 3 http://financialgenius.usbank.com/sites/default/files/u.s.%20bank%20students%20and%20personal%20 Finance%20Study_0.pdf 4 Based on total debt and percentage of households with credit card debt provided by the Federal Reserve. Number of households provided by the Census. http://www.federalreserve.gov/releases/g19/hist/cc_hist_sa_levels. html; 5 http://www.bankrate.com/calculators/credit-cards/credit-card-minimum-payment.aspx 6 http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0297.2012.02519.x/abstract 7 http://www.federalreserve.gov/econresdata/2014-report-economic-well-being-us-households-201505.pdf 8 Based on 360,000 respondents to the LearnVest.com profile, between 9/13/2013 and 11/30/2015. 9 https://mlaem.fs.ml.com/content/dam/ml/articles/pdf/artrgvp5.pdf 10 http://www.federalreserve.gov/econresdata/2014-report-economic-well-being-us-households-201505.pdf 11 Based on total debt and percentage of households with credit card debt provided by the Federal Reserve. Number of households provided by the Census. http://www.federalreserve.gov/releases/g19/hist/cc_hist_sa_levels. html; http://www.federalreserve.gov/pubs/feds/2011/201117/201117pap.pdf; http://www.census.gov/prod/cen2010/ briefs/c2010br-14.pdf. 12 http://www.federalreserve.gov/econresdata/2014-report-economic-well-being-us-households-201505.pdf 13 CB Insights. 14 http://www.learnvest.com/wp-content/uploads/2014/12/learnvest-financial-confidence-curve.pdf 15 http://money.cnn.com/2014/08/18/pf/child-cost/ 16 https://www.agingcare.com/articles/cost-of-caring-for-elderly-parents-could-be-next-financial-crisis-133369.htm 17 http://www.asa.org/site/assets/files/3793/life_delayed.pdf 18 http://magazine.good.is/infographics/student-loan-debt-is-astronomical 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. LearnVest, Inc. is wholly owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company. 20