Even rich households are turning to bad credit loans
Whenever we talk about payday loans, we often have a specific consumer in mind. We tend to think of an impoverished family who is about to miss their next rent payment or face the possibility of living in darkness becausese they didn’t pay their lighting bill. Therefore, since they don’t have the necessary funds before their next paycheck, they use a payday loan store.
It turns out that rich households are not only strapped for cash, but they’re also increasingly turning to bad credit loans to cover their broken down vehicle, a mortgage payment or faulty pipes.
According to a new study by The Brookings Institution, a considerable number of households earning $100,000 to $150,000 a year are having a hard time finding some cash for unforeseen events.
The report discovered that one-quarter of affluent households couldn’t come up with $2,000 within a month, and that doesn’t bode well for consumers in a fragile economy.
Researchers asked survey participants across all income levels if they could come up with $2,000 within 30 days to pay for an unexpected expense. Twenty-five percent of the richer participants conceded they couldn’t come up with the funds, while 19 percent said they could only do it if they were able to sell off their possession or turn to a payday loan business.
The study concludes that many Americans, rich or poor, are “financially fragile.” But to find that six-figure families do not have any savings is frightening, and suggests their money management skills aren’t good at all. So why is this exactly happening to wealthy households?
Study authors have honed in on a few key factors to determine why rich people can’t save:
The think-tank posits that higher earners are a lot more likely to get approved for immense mortgages, exorbitant lines of credit and other types of loans that poorer households wouldn’t make. Moreover, rich families are led into making mistakes and revising their priorities: spending comes first and saving comes second, or third, or fourth and so on.
Brookings researchers add that affluent households have to deal with high costs of living because they want to live in specific neighborhoods where the housing prices are huge. Households also have to deal with child care expenses.
Unfortunately, for the most part, Americans depend on instant gratification. This means that the more you earn the more you want to spend on non-essentials. For instance, a person making $25,000 a year will spend $100 a month on non-essentials, while someone making $125,000 will increase that discretionary spending to $1,000 a month.
Finance blog Motley Fool opined that more money may actually hinder your savings goals:
“In fact, earning more money might actually hinder your savings efforts if you use your higher income as a reason to justify unhealthy spending habits. That’s why good savers tend to have one thing in common, and it isn’t a six-figure salary; it’s a savings mentality. Simply put, if saving money is important to you, you stand a better chance of building up a sizable nest egg than someone whose mind isn’t geared toward saving money.”
With even rich families turning to payday loans or selling off their stuff, it just amplifies the notion that more Americans need greater financial literacy, particularly from a young age and perhaps for the rest of their lives.
This comes as Brookings recently published a paper calling for the need for regulations of small-dollar and payday loans in the United States.
And this isn’t the first time that the organization discovered such results. In 2014, it released a study called “The Wealthy-Hand-to-Mouth,” which found that one-third of wealthy households live hand-to-mouth since they own illiquid assets.