Close to nine in 10 American households are engaged in some type of formal or informal financial planning but the extent of this planning varies greatly, according to research sponsored by the Consumer Federation of America (CFA) and Certified Financial Planner Board of Standards (CFP Board).
The research identified four distinct financial planning profiles that include all American households, comprehensive planners, basic planners, limited planners and non-planners.
Comprehensive planners represented 19 percent of respondents. All members of this group have a comprehensive financial plan that goes beyond a simple household budget to cover things like retirement savings and insurance. Two-thirds of comprehensive planners used a financial professional to help prepare such a plan. These households have specific savings goals as well, with 88 percent having a specific plan for retirement and 80 percent having a plan for emergency savings.
Basic planners represented 38 percent of respondents. While two-thirds said they have a household budget, fewer than half (41 percent) said that budget is written down. Just seventeen percent of basic planners used a financial professional to help prepare their plan. Almost two-thirds (64 percent) have a savings plan for retirement and 38 percent have an emergency savings plan.
Limited planners represented 33 percent of respondents. A large majority of limited planners (69 percent) either have a household budget or a plan to address at least one individual savings goal—typically for retirement savings—but not both. And few limited planners (11percent) think they will make a comprehensive plan in the next year. Most (91 percent) either have no credit card debt or have a plan to pay off this debt.
Non-planners represented 10 percent of respondents. This group does virtually no financial planning. Nine in ten (92 percent) said they have no plan for any specific savings goal, and virtually none (99 percent) think they will create a comprehensive financial plan in the next year. They also are the group with the most difficulty managing credit card debt. Four in ten have credit card debt that needs to be paid off and fewer than half with this debt have a plan to pay it down.
“Low and moderate income households clearly face more barriers than do high income households to developing a comprehensive financial plan,” said Stephen Brobeck, CFA’s executive director. “Theses barriers range from lack of access to financial planning professionals, to lack of skill when working on their own personal financial issues, or to just a lack of financial resources. However, these lower income households can benefit the most from carefully planning their spending, saving and debt management.”
The research found that the more extensively households plan, the better prepared they are financially in terms of saving, investing, and managing credit card debt and the higher their confidence is in managing their finances.
Brobeck suggests non-planners and limited planners start by saving loose change or ask their bank or credit union to transfer $25 a month from their checking to savings account, so they can realistically aspire to be at least basic planners. “Making this aspiration a reality would certainly improve their financial condition.”
While higher income households are more likely than lower income households to plan, according to the survey more than half (54 percent) of comprehensive planners have annual incomes below $100,000 including twenty four percent who have incomes below $50,000. By comparison, among non-planners, 53 percent have incomes under $25,000.
The research also found that about half (49 percent) of comprehensive planners have a four-year college degree, while 69 percent of non-planners have a high school education or less.