Changes in Family and Personal Finances in the Last Generations - Essay Example

Changes in Family and Personal Finances in the Last Generations Introduction Financial and economic environments and trends show that there have been changes in family and personal finances in the last generations. Family and personal finances of people of generation X were different from the family and personal finances of people of generation Y. People of generation X lived through a period of social and economic turmoil. Social factors such as racism and gender discrimination in the workplace affected their financial status because of low productivity levels. Political factors such as the Cold War and political tensions globally also affected their productivity and participation in economic activities, which in turn affected their financial status. These people benefited from the social and political stability witnessed from 1970-2000. Personal and family finances of people of generation Y have changed because of changes in government policies, information technology and globalization. Most generation X families relied on one paycheck. This means that only one spouse engaged in economic activities. Though these families relied on one paycheck, they spent 54 percent of their income. Spending was mainly concentrated on fixed expenses such as insurance, mortgage, food and loans. Conversely, most generation Y families have both families working. These families spend 75 percent of their earning on fixed expenses (Warren and Tyagi 20). The spending trends of generation X and generation Y are important because they show that generation Y is more financially vulnerable than their counterparts of generation X. In case of uncertainties such as illnesses and job loss, people of generation X could easily cut back on their spending. These families used 54 percent of their income on fixed expenses and 46 percent on discretionary spending such as fashion and vacation. They could easily cut back on these spending in order to ensure that they overcome the uncertainty. A generation ago, families could address setbacks such as illnesses and job loss by cutting back on their spending. 54 percent of the income of these families was used on fixed expenses. These means that the families could cut back their spending by approximately 46 percent. Conversely, generation Y families could face difficulties in case of these setbacks. These families use 75 percent of their income on fixed expenses, which cannot be easily cut back. They can only cut back 25 percent of their expenses compared to 46 percent for the last generation. Generation Y families would probable require loans and debts in order to overcome these setbacks. Additionally, typical generation Y families have both spouses in work. Even with both spouses in work, the families spend 75 percent of their income on fixed expenses. In case one of the spouses stops working, the family will most probably face challenges because it will still spend 75 percent of its income on fixed expenses (Warren and Tyagi 22). Generation Y families and people cannot go through a financial crisis without depleting savings or resorting to debts. Over the last generation, the likelihood of losing healthcare insurance has skyrocketed. People of generation Y are 49 percent more likely to lack healthcare insurance than their counterparts of the last generation. Approximately 35 percent of adult Americans below 65 years were uninsured in 2006 and 2007 (Warren and Tyagi 29). In cases where generation Y people have healthcare insurance, the co-pays and deductibles have almost tripled. Additionally, insurance companies are failing to provide cover for illnesses. They also limit the amount of money paid for treatment. People of generation X did not face this challenge because they received healthcare insurance from their employers. They did not consider healthcare issues such as cost in their expenses. The most important change in the last generation can be seen in retirement. People of the last generation had jobs that had defined benefit pensions (Warren and Tyagi 37). Additionally, these people had dependable fixed payments. They knew that during their retirement, they would receive the fixed payments. In case the paying firm went into bankruptcy, the U.S government would guarantee payment for the entire pension. This changed with the last generation. In this generation, only 11 percent of private employers give defined-benefit pensions. Most Americans rely on a plan that allows them to save money for retirement. The retirement option available to people of this generation is riskier compared to the defined pension plan offered to people of the last generation. People of this generation require personal finance knowledge in order to manage the money they have saved, and avoid mistakes. They need knowledge on how to invest the money in diversified mutual funds. Most people of this generation do not know how to invest in diversified mutual funds. For instance, it is common for people to invest in undiversified mutual funds. They invest all their retirement savings in a single stock, which in most cases is the stock of the firm that employs them. Former Enron employees lost their retirement savings because they invested all the savings in the stock of the company. When the firm collapsed, their retirement savings lost value. Another financial area that has witnessed changes over the generations is mortgaging. A generation ago, banking, borrowing and mortgaging were highly regulated. Regulatory agencies ensured that banks and financial institution charged moderate interest rates. Current sub-prime mortgage rates that range from 10-15 percent were not applicable in the last generation (Warren and Tyagi 69). Banking regulations in the last generation also prevented banks from charging high borrowing fees, which currently stands at 20 percent. As a result of the tight regulations, banks were only willing to lend to people who could guarantee the repayment of the loan or mortgage. Recommendations Elizabeth Warren and Amelia Warren Tyagi outline a number of recommendations for financial security. According to the two authors, people should create a balanced financial budget. According to the two authors, a balanced budget ensures that people create wealth while managing their financial resources. Attaining a balanced budget is important in the payment of fixed expenses and discretionary expenses. The second recommendation by the two authors is saving. Saving is important in the management of financial resources because it ensures that people have money to overcome uncertainties. The two authors also recommend that people should manage their wants (Warren and Tyagi 151). In order to avoid the dangers of financial uncertainties, people need to set clear limits of the wants. Conclusion It is evident that family and personal finances have changed over the generations. These changes can be seen in areas such as borrowing, spending, healthcare insurance and saving. Families of the last generation could easily overcome uncertainties such as job loss or illness by cutting back on their spending. Elizabeth Warren and Amelia Warren Tyagi gave a number of recommendations on financial management in their book “All Your Worth: The Ultimate Lifetime Money Plan”. The two authors recommended that people should practice saving, manage their wants and create a balanced budget. Work Cited Warren, Elizabeth and Tyagi, Amelia. All Your Worth: The Ultimate Lifetime Money Plan. Simon and Schuster. 2006. Read More