Inflation, high interest rates, a fragile job market and the COVID-19 pandemic are all making American adults more worried about money, with more people saying they are the least secure in their finances in more than a decade. But those same people also said they still plan to spend money on eating out, vacations and other forms of entertainment this year.
Those are some of the findings from Northwestern Mutual’s 2024 Planning and Progress Study, which surveyed 4,588 U.S. adults in January. A full third of respondents, 33%, reported feeling financially insecure—up from 27% in 2023, and the highest share since Northwestern Mutual began measuring financial security in 2012. Only 41% of respondents reported feeling very financially secure, the smallest proportion in the history of the report.
There are many reasons for this, Christian Mitchell, chief customer officer at Northwestern Mutual, said at a news conference announcing the study. Although the economy now looks stronger according to traditional indicators such as falling inflation, falling unemployment and a roaring stock market, many Americans remain anxious. Just since 2020, they have endured a pandemic that has caused soaring unemployment, decades-long inflation and rising interest rates. A disputed presidential election and global instability are unlikely to help matters.
“It’s hard to feel positive”
This recency bias weighs heavily on many Americans, especially when it comes to higher prices. According to the report, inflation is “the clear driving force underlying this instability” and is overshadowing much of the positive economic news. More than half of U.S. adults cited this as the biggest barrier to financial security.
Inflation reached 9% in mid-2022, its highest level in 40 years, and remains above the Federal Reserve’s 2% target. In particular, high food and housing prices are straining budgets. has grown by double digits over the past three yearsand housing costs have never been higher.
Although inflation has fallen recently, more than half of respondents expect it to continue to rise, and only 9% of households said their income is growing at a faster pace. Americans want prices to return to pre-pandemic levels. The Federal Reserve notedbut this doesn’t happen.
“Financial shock fatigue and instability are keeping people from feeling positive about their financial security,” Mitchell said in a press release. “Despite a growing economy, Americans have had to endure one financial crisis after another over the past few years, and it’s hard to feel positive when you don’t know what’s around the corner.”
Higher interest rates, initiated by the Federal Reserve to fight inflation, are adding to Americans’ pessimistic view of the economy. Mitchell noted that it is more expensive for young millennials and Gen Z to be in debt or borrow money than ever before.
This is especially important to consider as total credit card debt in the U.S. topped $1 trillion for the first time in 2023—due in part to inflation—and continues to rise. Credit Karma data shows that the younger generation is suffering the most.
“These consumers are increasingly relying on credit to survive,” Mark Elliott, chief customer officer at LendingClub, said recently. Luck. “Higher levels of debt impede the achievement of financial goals, but also pose long-term risks to economic well-being and mental health.”
Moreover, it is difficult to overstate the impact of mortgage interest rates and rents on sentiment. The average monthly mortgage payment increased from $1,500 in 2021 to more than $2,600. according to Redfinwhile the current asking rent has increased by 30% since the beginning of the pandemic. More Americans were locked out of the housing market while paying more and more in rent each month.
And economists may actually be underestimating how much rising rates hurt consumers. A new working paper from a team of researchers including former Treasury Secretary Larry Summers shows that the Bureau of Labor Statistics’ official consumer price index does not fully account for how much more expensive interest rates, especially mortgages, are rising. also car payments and credit card debt. When rising interest rates are factored into the new inflation measure, consumer sentiment better aligns with rising costs of living.
“Consumers, unlike modern economists, consider the cost of money to be part of the cost of their lives,” the authors. noteand “interest payments on a new 30-year mortgage for the average home have more than tripled since 2021.”
“Put these points into a plan.”
At the same time, Americans don’t necessarily plan to slow down their spending, which is keeping the economy afloat even in an environment of high prices and high interest rates. The report found that 59% of adults say they will spend the same or more on discretionary purchases in 2024. Gen Z is the generation most likely to say they won’t give up, while Gen X is most likely to reign in spending.
Mitchell pointed to a recent Federal Reserve report that showed that people under 40 had their net worth growing the fastest in the years since the pandemic. In turn, they may feel more confident in their ability to spend while still pursuing other goals such as saving and investing.
He also noted the apparent gap between American perception about their financial security and plans to continue spending, warning consumers not to ignore the long-term consequences.
“Indulging in pleasurable things or experiences can be great if it’s part of a solid financial plan, but if it’s not planned, any emotional benefits may be short-lived or even turned upside down,” Mitchell said. Luck. “My advice: If you want to splurge, spend money, but build those things into a plan so you can feel financially secure—and not feel guilty—about them.”