man in tiny boat trying to row away from sharks (Photo: Shutterstock)

Even before the COVID-19 outbreak led to massive numbers of unemployed workers and a significant downturn in the US economy, Americans struggled to save enough to provide a financial cushion to weather the storm.

Two recent studies by Northwestern Mutual found that one-third of Americans were within “three missed paychecks” of not being able to pay bills or having to take out loans to survive, and that debt accumulation was a contributing factor.

The 2020 Planning & Progress Study, an annual research project commissioned by Northwestern Mutual that explores Americans’ attitudes and behaviors toward money, financial decision-making, and broader issues impacting people’s long-term financial security, polled 2,650 American adults aged 18 or older between February 12-25.

The study showed that when it comes to Americans protecting themselves from economic uncertainty, they still view cash and money market funds as the best defense. Other sources such as stocks, bonds and life insurance came in right behind in a three-way tie for second as a protection source.

Not sure what the best financial defense is

With that said, this doesn’t really show the real issue. Because per the study, nearly a third of people polled were actually “unsure of what their best financial defense should be at a time of uncertainty and volatility.”

Not only were 31% unsure what to do in times of uncertainty, almost 75% of Americans say their financial planning “needs improvement” while also equally recognizing that it is an important thing to do.

The debt impact: credit cards and mortgages

Another contributing factor to Americans’ inability to save properly is the amount of accumulated debt. The study reveals that among Americans who carry debt, a third of their monthly income goes toward paying it off. It is important to note that this number did not include income that went towards a mortgage – which per the study is tied with credit card debt as the leading source debt.

The study showed that part of the debt problem may be tied to the fact there also appears to be a learning curve when it comes to credit card usage. The study showed that more than six in 10 Americans with credit card debt said that if given the choice, they would have changed the way they used credit cards in the past.

This accumulation of debt significantly impacts U.S. adults to be ready for a finance storm. In fact, the study shows that of those with debt, 58% say it has a substantial or moderate impact on their ability to achieve long term financial security. Additionally, many report that carrying debt impacts their ability to reach major financial milestones. In the poll,  almost a third said it delayed them saving for retirement.

It is important to note that although the data indicates that Americans have been making progress in their ability to manage and reduce debt over the last several years, the findings were collected just prior to the steepest impacts of the COVID-19 outbreak. So the full impact of the COVID-19 pandemic on debt management for individuals remains to be seen.