Money Rehab with Nicole Lapin - You May Be Richer Than You Think. Here's Why.

Episode Date: May 31, 2023

Nicole gives her weekly pulse check on Wall Street. Today: the complicated story of America's household savings. By some metrics, the average American net worth is on the rise. But on the other side of the coin, we're facing an uphill battle. So, what's the real story? Nicole explains.

I love hosting on Airbnb. It's a great way to bring in some extra cash. But I totally get it that it might sound overwhelming to start, or even too complicated, if, say, you want to put your summer home in Maine on Airbnb, but you live full-time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you.

I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself.

Find a co-host at Airbnb.com slash host. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. All right, here's your weekly roundup of the headlines that are affecting you and your money. We've heard a lot in the last few weeks about the debt ceiling and the American government's inability to make a budget.

Part of that struggle comes down to the question, how much debt is too much debt? Because there is good debt and there is bad debt, even for governments. But the national stage isn't the only arena where America is struggling to make a financial plan. Let's take a look at the state of American savings and debt to find out how balanced our budget really is in our own homes. Right now, savings accounts and money market accounts are offering the best interest rates they have in years. So this is a really great time to save if you can. Let's break down that jargon first because although they might sound the same, money market funds, money market accounts, and savings accounts function a little bit differently from each other. Money market funds are mutual funds that are very low risk, low return investment

vehicles. Money market accounts function like money market funds in that they require a minimum investment and then invest your money in low risk assets for a better return. But money market accounts come with debit cards, which make them more of like a love child between a bank account and a money market fund. Savings accounts are just money in the bank. Savings accounts in legit banks are FDIC insured, and savings accounts in legit credit unions are NCUA insured. Money market accounts are insured, but money market funds are never FDIC insured as

they're considered investment vehicles. All right, so back to American savings. The narrative right now around American household savings rates are all doom and gloom. But the picture is actually a little more nuanced because there are two numbers here that really matter. Household net worth and the personal savings rate. Household net worth has largely been up, often because assets are worth so much more now. If you bought a house five years ago, your net worth is probably up, in many cases substantially, because your house is likely worth more now. Plus, there's always money in the bank. One analysis from the Fed calculated that Americans have $1.1 trillion

more in savings this spring than they did in February of 2020. Okay, America. And the Nasdaq, S&P 500, and the Dow Jones have all been steadily climbing since 2009. While we might be off from our 2021 highs, the market is still up overall. So if you have investments, especially if you've been investing for a while now, you're probably worth more than you were five years ago. P.S., if you needed a sign to start investing, that was it. But when we talk about the savings rate, as in the amount of money a household saves as a percentage of their take-home pay each month, that number has fallen sharply. that number has fallen sharply. Right now, it's about 4.1% for April. That's about half of its annual average over the last 50-ish years. The story around this seems to be a double-edged inflation sword. People have more valuable assets, but they need to spend more money to

keep up with their expenses, which makes it harder to save money. And sadly, they are starting to use assets to pay for some of their expenses. In one of the bigger bummers this year, more people are withdrawing money from their 401ks early. In the final quarter of 2022, Fidelity and Vanguard both noticed a slight increase in people withdrawing more money from their 401ks early, about half a percentage point increase. The trend is continuing this year with Bank of America reporting that there's a 33% increase in the number of customers withdrawing money early in 2023 over 2022. It's reasonable to expect that these sorts of withdrawals will continue to rise since Secure 2.0 passed. Secure 2.0 is a federal law that will go into effect in 2024, and it will make it easier to draw down money from

401ks early. Under current rules, if you withdraw money from your 401k early, you have to certify that it's for an emergency and there's a 10% tax penalty. The new law allows you to withdraw up to $1,000 a year without the 10% tax penalty and really loosens those emergency rules. out the 10% tax penalty and really loosens those emergency rules. Now, I'm telling you this right now, please don't use it if you don't absolutely have to. And instead, try to put money into your emergency fund before you even put money into your retirement account. And tap that first if you need it. Let's just say you have $1,000 with a very modest 4% interest rate. Over 20 years, you're going to have double that, more than two grand. So compounding interest really works magic and literally doubles your money. But that trick can only happen if you have the money invested and

you leave it invested. Time is the only thing you need to make compound interest do its thing. This is why I'm pretty torn on Secure 2.0. We all go through hard shit, and I appreciate that government is giving folks more options of how to navigate financial hardship. But what I don't want is for folks to be encouraged to withdraw funds from their retirement early if they don't absolutely have to. Because while that might help you now, it's definitely going to hurt your future self. This is why I keep saying to prioritize funding your emergency fund first. And if you have to spend all of the money in your emergency fund, take a pause from contributing to your retirement accounts to build back your

emergency fund. Your retirement investments will continue to earn interest, but only if you leave that money there and use your emergency fund to fund emergencies. I get it. It's simple, but not easy. Further complicating the big picture of the American household budget is the national debt. No, not the debt ceiling this time. Total household debt. Now, the federal debt is $31 trillion and some change. Okay, a lot of change. The national household debt is a little more than half of that. $17 trillion and a lot of change, which has been the highest it's ever been. Part of the reason for the increase is actually the same reason for the increase in household wealth.

Assets like homes are costing more than ever. Of that $17 trillion in household debt, $12 trillion is mortgage debt, which leaves a more manageable $5 trillion in credit card debt, student loans, and auto loans. So while that number seems so scary, $17 trillion, like who can wrap their head around that? Much of it is mortgage debt, which is not all bad debt, unless of course you can't pay your mortgage, which is a topic for another time. So while the debt burden looks terrible and we should all be asking questions about some of the predatory lending practices, it isn't quite as bad as it first seems. When it comes to raising the household debt limit, it isn't quite as bad as it first seems.

When it comes to raising the household debt limit, I don't think we should do that. Americans owe $986 billion in credit card debt alone. Can you imagine paying that off with a 20% APR? And while this debt also represents growing wealth for people who bought houses during that time, other people are starting to struggle. While student loan delinquency has actually dropped, all other types of serious delinquency, which looks like being more than 90 days late with a payment, have risen in every other category. The largest jump has been credit card debt. Delinquency on credit card debt has gone up a percentage point and a half just in the last six months. So in summary, net-net,

what I have been saying all along, whether you're a country or you're an individual human, budgeting is hard and we could all lose some money rehab. For today's tip, you can take straight to the bank. Auto loans is an industry with a lot of predatory lending. So no matter what anyone tries to sell you, your car loan payment shouldn't be more than 15% of your take home pay. So if you take home four grand a month, your auto loan should be 600 bucks or less. But you don't want to get those payments lower by taking out a longer term loan because those in the end cost a lot more. When buying a car, it's important to look both at the monthly cost as well as the total cost in order to keep that budget balanced.

I love hosting on Airbnb. It's a great way to bring in some extra cash, but I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full-time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high-quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you.

I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host, so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. Money Rehab is a production of Money News Network. I'm your host, Nicole

Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.