New Research Shows Most American Households Do Financial Planning, But The Extent of This Planning Varies Greatly
Those Who Plan, Regardless of Income, Save More and Feel More Confident About Their Financial Futures
Close to nine in ten American households are engaged in some type of formal or informal financial planning but the extent of this planning varies greatly, according to new research sponsored by the Consumer Federation of America (CFA) and Certified Financial Planner Board of Standards (CFP Board).The research shows that only one in five household decision makers (19%) are comprehensive planners, who take a methodical approach to financial planning, while one in ten (10%) do virtually no financial planning at all. The research further identifies nearly two-fifths of households (38%) as basic planners and one-third of households (33%) as limited planners.
One of the most compelling findings is that the more extensively households plan, the better prepared they are financially in terms of their likelihood of saving, investing, and managing credit card debt; the higher the effectiveness of this saving, investing, and debt management; and the higher their confidence in managing their finances. While higher income households are more likely than lower income households to plan, more than half (54%) of comprehensive planners have annual incomes below $100,000.
“Those families with the lowest incomes are the ones who would benefit the most from financial planning,” noted Stephen Brobeck, CFA’s Executive Director. “Households with the fewest financial resources benefit the most from carefully planning spending, saving, and debt management,” he said, though he also added that “marshaling limited financial resources to meet essential needs represents a huge challenge for these households.”
CFA and CFP Board undertook the research with assistance from Princeton Survey Research Associates International (PSRAI), which surveyed a representative sample of 1,002 financial decision makers nationwide from April 12 to 24, 2013. The survey included more than 60 questions and has a margin of error of plus or minus three percentage points. This press release includes additional data from cross-tabulations and calculations that are not included in the published report.
“This research reaffirms the value of financial planning for all households and also the value of receiving assistance from a financial professional who always puts the clients’ best interest first and abides by a fiduciary standard of care,” said CFP Board CEO Kevin R. Keller, CAE.
Research Identifies Four Distinct Household Financial Planning ProfilesThe analysis identified four distinct financial planning profiles that include all American households. Specific planning characteristics associated with each profile are found in the table below and in the accompanying infographic.
- Comprehensive Planners (19%): 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 (67%) of comprehensive planners used a financial professional with fiduciary accountability, specifically a Certified Financial Planner ™ professional or a Registered Investment Advisor, 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 (38%): The large majority of basic planners (80%) have a plan for one or more specific savings goals, though only 35 percent have a comprehensive plan that organizes these plans, with another 31 percent saying they are likely to make a plan in the coming year. While two-thirds (66%) say they have a household budget, fewer than half (41%) say that budget is written down or stored in electronic format.
- Limited Planners (33%): A large majority of limited planners (69%) either have a household budget or a plan to address at least one individual savings goal – typically for retirement savings – but not both. And very few limited planners (11%) think they will make a comprehensive plan in the next year. But most (91%) either have no credit card debt or have a plan to pay off this debt.
- Non-Planners (10%): This group does virtually no financial planning. Nine in ten (92%) say they have no plan for any specific savings goal, and virtually none (99%) 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.
The more extensively households plan financially, the better prepared they are to meet goals ranging from dealing with financial emergencies to living well in retirement.
Financial planning is strongly associated with confidence in managing finances. Nearly all comprehensive planners (94%), about four-fifths of basic planners (81%), less than three-quarters of limited planners (70%), and only about half of non-planners (53%) have this confidence.
Financial planning is also highly correlated with saving for financial goals- A large majority of comprehensive planners (91%), fewer than three-quarters of basic planners (73%), about two-fifths of limited planners (39%), and only one-fifth of non-planners (20%) save for emergencies.
- A large majority of comprehensive planners (91%), only 70 percent of basic planners, two-fifths of limited planners (40%), and only about one-third of non-planners (32%) save for current or future retirement.
And financial planning is strongly associated with actual financial preparedness in terms of current savings, level of saving, and sufficient property and life insurance
- A large majority of comprehensive planners (85%), less than three-fifths of basic planners (58%), little more than one-quarter of limited planners (27%), and only 15 percent of non-planners have at least three months saved for emergency expenses.
- About three-fifths of comprehensive planners (61%), fewer than two-fifths of basic planners (36%), and small minorities of limited planners (13%) and non-planners (6%) save 10 percent or more of their annual income.
- Nearly three-quarters of comprehensive planners (72%), about two-fifths of basic planners (41%), less than one-third of limited planners (29%), and only about one-fifth of non-planners (19%) say they have sufficient property and life insurance.
Income and Education Correlate with Financial Planning But Far From Perfectly
Predictably, the higher one’s household income and level of education, the more likely one is to engage in financial planning. Among comprehensive planners, close to half (46%) report annual household incomes of at least $100,000 and about half (49%) have a four-year college degree. By comparison, among non-planners, over half (53%) have incomes under $25,000 while more than two-thirds (69%) have a high school education or less.
But these correlations are far from perfect. The majority of comprehensive planners are middle class. In fact, a majority (54%) have incomes under $100,000, including a quarter (24%) who have incomes below $50,000. Furthermore, limited planners and non-planners have very similar demographic profiles in terms of income and education.
| Survey Items included in the Household Financial Planning Index | ||||||
|
| Total | Comprehensive Planners | Basic Planners | Limited Planners | Non-Planners | |
| COMPREHENSIVE FINANCIAL PLANNING BEHAVIORS | ||||||
| Have a comprehensive financial plan | 32% | 100% | 35% | 1% | 0% | |
| Likely to get a comprehensive financial plan in next 12 months | 16% | 0% | 31% | 11% | 1% | |
| Have updated/will update plan in previous/next 12 months | 23% | 84% | 18% | 0% | 0% | |
| Plan is written down or in computer/electronic file | 26% | 95% | 22% | 0% | 0% | |
| Spent 2 hours or more preparing or reviewing plan | 21% | 77% | 18% | 1% | 0% | |
| Had any professional help or used computer/online tool in creating plan | 28% | 91% | 30% | 0% | 0% | |
| Had a financial professional with fiduciary responsibility create plan, specifically Certified Financial Planner™ professional or Registered Investment Advisor | 19% | 67% | 17% | 0% | 0% | |
| Current plan has a majority (5 or more) of key planning elements, or future plan will have majority of key planning elements[1]
| 43% | 96% | 58% | 7% | 0% | |
| BASIC FINANCIAL PLANNING BEHAVIORS | ||||||
| Have a household budget | 57% | 88% | 66% | 44% | 6% | |
| Household budget is written down | 32% | 63% | 41% | 15% | 0% | |
| Planning for current or future retirement[2] | 52% | 88% | 64% | 31% | 8% | |
| Planning for emergencies | ||||||