In an era where two-thirds of surveyed Americans report living paycheck to paycheck, families across America are facing greater financial pressure. Recent reports highlight that household debt reached $17.69 trillion in the first quarter of 2024, with housing now more unaffordable than it has been in nearly four decades.
Amidst these pressing conditions, one in four U.S. adults find themselves without emergency savings. Many are increasingly dependent on high-interest credit options. While this approach may provide temporary financial relief, it can pose a significant risk to long-term financial stability.
In a recent webinar, Josh Rosenthal, Corestream’s Senior Director of Sales and Account Management, joined Rishi Kumar, Co-Founder and Co-CEO of Kashable, to explore some innovative strategies that can help employees manage debt and safeguard their future financial health.
The Current State of Consumer Financial Health
Rishi Kumar shed light on the deteriorating state of consumer financial health due to a number of pressures. Despite incremental wage growth, many Americans still don’t feel better off than they were a few years ago. Stimulus checks temporarily bridged this gap during the COVID-19 pandemic, but now fewer options remain to help alleviate the financial impact.
Kumar said, “Concurrently, interest rates have surged, exacerbating the financial strain for most Americans, who find themselves as net interest payers rather than earners. This includes obligations such as mortgages, car loans, and credit card debts, which are often tied to these rising prime rates, leading to unprecedented financial pressures.”
Coping Strategies in Tough Economic Times
When asked about how individuals may be managing to stay financially afloat, Kumar pointed out that with wages failing to cover basic expenses, many might not have emergency savings to fall back on. As a result, many Americans are reliant on credit. This reliance is signaled by the noted increase in credit card debt. Kumar notes that with credit card interest rates soaring, often reaching into the high twenties, the option of responding to a debt event via a high interest credit card is a suboptimal financial choice.
Additionally, some individuals are also tapping into their retirement savings, a move that could help to provide some immediate relief but could also undermine their financial stability in the long term.
Misconceptions Around 401k Withdrawals and Loans
When considering the option of taking a 401(k) loan, Kumar highlights that this fails to account for the complex repercussions this action can have on future financial stability.
He says that although 90% of plans permit borrowing, this is intended as a psychological safety net rather than a recommended practice. Kumar notes that statistically, up to 40% of individuals with a 401(k) will have a loan outstanding within a five-year period, illustrating the prevalence of this risky financial behavior.
Additionally, taking a 401(k) loan introduces several technical and financial challenges. Loans are funded with after-tax dollars, yet withdrawals are taxed again because they’re mingled with pre-tax contributions, effectively taxing the money twice.
More critically, if the employee is terminated, individuals must repay the loan immediately, or it defaults. Defaulting leads to the loan amount being treated as taxable income, plus a 10% penalty if under retirement age. Over time, even a small loan can significantly diminish potential retirement savings.
Addressing Wealth Equity Challenges
Kumar highlights that systemic inequities, not individual choices, often dictate financial outcomes. He notes that the structural biases in the credit system disproportionately affect younger generations, minorities, and women.
He gives an example of credit scores, which are heavily influenced by the length of credit history. This factor inherently disadvantages young people who haven’t had the opportunity to build a financial footprint. The discrepancy could affect their ability to secure loans, rent homes, and even buy cars compared to older generations.
Kumar says that racial and gender disparities may also further impact financial stability. Historically marginalized communities, particularly in black majority neighborhoods, face hurdles in achieving credit scores that meet the threshold for mortgage approvals. Similarly, women face a wealth gap exacerbated by lower earnings and career interruptions, leading to less retirement savings.
Enhancing Financial Wellness with Kashable
In the webinar, Kumar speaks about how the role of Kashable can help to alleviate some of the economic pressures faced by employees. In an effort to help employers offer meaningful benefits and provide employees with an alternative to borrowing from their 401(k)s or other retirement plans, Kashable provides an average loan size of $3,500 to $4,000 with low-fixed APRs and affordable repayment terms. Our low-cost loans serve as both a financial safety net during emergencies and can help employees avoid making early retirement withdrawals.
Impact and Benefits of Kashable’s Program
For employees, Kashable’s program can offer a viable alternative to high-interest loans and early withdrawals from retirement accounts. Corestream’s platform makes it possible to deliver Kashable’s financial wellness benefits, including low-cost loans, to a broad range of employees across various sectors. This partnership effectively integrates Kashable’s services into Corestream’s benefits offering, enhancing the value provided to both employers and their employees by addressing crucial financial wellness needs directly through the workplace.
I am aware my credit score is low but I want to take step to raise my credit score