From the Wall Street Journal:
Don’t Blame the Latte: The Real Reason You’re Not Saving More Is Closer to Home
By JONATHAN CLEMENTSThe U.S. savings rate has fallen sharply since the mid-1980s. In fact, last year, it was negative for the first time since 1933.
At first blush, this collapse in the savings rate seems puzzling. Our incomes have climbed at a healthy clip over the years, easily outstripping growth in spending on key items like food and clothing.
So why do we find it so tough to save? We can’t, it seems, blame it all on morning lattes and evenings out. Instead, the big culprits are our two largest expenses: The roof over our head and the cars in our driveway.
Some pundits have argued that the savings rate isn’t as low as the official statistics suggest, or that Americans don’t need to save so much because they are wealthier than ever. But when I look around, I see plenty of signs of financial distress.
A study sponsored by Putnam Investments estimates that seven million retirees have chosen or felt compelled to return to work. A Pew Research Center survey discovered that 20% of baby boomers had provided financial help to a parent within the past year. Families are also finding it tougher to pay for college, with College Board data showing a 194% increase in annual borrowing through college loans over the past decade.
…
It might seem like Americans spend too much on clothes, eating out and entertainment. In reality, however, the portion of our spending that’s devoted to food and apparel has fallen sharply over the past century.Tobacco and booze also account for a shrinking share of spending. Meanwhile, the slice of our budget that goes to entertainment and health care isn’t much changed from 40 or 50 years ago. Indeed, if you look at all these categories, you might imagine families have ample financial room for maneuver.
…
Yet we struggle to save — and the blame seems to lie with two other expenses, transportation and housing.Our transportation spending jumped sharply in the 1960s and has remained high ever since, accounting for more than 19% of spending in 2002-03. It’s easy to see why: The number of passenger vehicles has leapt 270% since 1960, far ahead of the 86% increase in the adult population. We now have one car, van, pickup truck or sport-utility vehicle for every adult.
…
Meanwhile, housing expenditures have climbed fairly steadily over the past century, and our homes now claim a third of our spending.More families are buying houses, more folks are purchasing second homes, and houses are getting bigger. According to the Census Bureau, over the past 25 years, the number of second homes has jumped 95% and the size of the typical newly constructed single-family home has ballooned 40%.
…
“The trend has been to buy the most house you can afford, rather than the amount you need,” notes Sophie Beckmann, a financial-planning specialist at A.G. Edwards in St. Louis. “It’s the same thing with cars. You see a lot more luxury cars on the road. While you can get by with a $20,000 car, people buy the $40,000 SUV with the leather seats and the TV. There’s a lot there that’s discretionary.”
“It might seem like Americans spend too much on clothes, eating out and entertainment. In reality, however, the portion of our spending that’s devoted to food and apparel has fallen sharply over the past century.”
OK…so it’s not the $300 jeans, huh! ;)
Pat
Or, we buy the McMansions and the SUVs cause we think we’re gonna inherit big:
How much will you inherit?
“A record $45 trillion is being handed down – but not everyone gets a share.”
http://tinyurl.com/juevj
No Bids NO NOTTING!!
Do not be a fool and buy now you will be bigtime underwater.
then what?
BOOOOOOOOOOYcott Houses RIPOFF
Bob
I was at a family function over the weekend and one of my wife’s cousins started talking about how well his nephew is doing. Evidence: he’s 23 yrs old and just bought a brand-new Mercedes. So naturally I asked what he does for a living that makes him so successful. Answer: he manages a bowling alley.
does the savings rate account for investments, 401k, college funds, etc? could it be people are not saving as much per month and not worried about it because they’re “managing” their money not just overspending?
I would think people today are more sophisticated than ever with all the financial instruments available. Or are we simply getting stupider?
Does the bowling alley manager live at home and have no college loans?
Just curious.
I agree with the increase of housing spending.
First time home buyer I know from last 3-5 years are spending 40%-60% of after tax income.
Cars wise. I know most ppl are leasing or financing cars they can’t afford just to keep up with Jones. It seems that it is a default to have a big SUV to live in the suburb!!!!
However I believe “cars image issue” has been around for a few decades.
I believe that the savings rate calculation is based on disposible income. The key definition is what exactly is disposable income? However, the calculation may not take into consideration automatic deductions that are taken from your pay (e.g. flexible spending, dependent care, 401, IRA contributions, etc. Personally, I am maxing out my 401(k) just because I want to defer as much tax as possible. I mean who wants to pay more tax than what is legally required. Heck, some of my colleagues even elected to defer a percentage of their salary. If enough people do this, it may render the results invalid.
This is exactly what I was talking about the other week.
Some other study noted that the 3 biggest expenses, which consume a much higher % of American incomes than in years past are: housing, health care, and education.
Andy
it was just a matter of time :)
http://www.brokefolk.com/
Do you think that in 75 years, our greatgrandchildren will have chapters in their Social Studies books/pocketpods about a weird life stage called “Retirement / Jubilación?” It was all the fashion in the 20th century, but became impossible because of the immergence of the Barbie/Ken image marketing phenomenon of the late 20th Century, combined with a shift from real economic production to wealth-shifting?
Pat
Oops – spell check on Aisle 7:
immergence = emergence
I don’t want to give the Corzine-haters more grist for the mill, my taxes in Leonia, which have risen nearly 40% in eight years, are taking approx. $300/month more out of my savings, compared to 1998.
Otherwise, I’ve learnt to make do with less, just out of the desire to simplify things and generate less waste.
After taxes and rent payments, I ain’t left with anythingto save, cause the rests goes to food, transportation. No cable, no fancy clothes. Life sucks here in NJ. Not only are the houses overvalued, but NJ + NY is overrated. I am going to get the hell outta here.
Is their any reason people need to spend $3000 a month in rent or more to live in the right neighborhood or thousands of dollars a month on designer crap like Abercrombie & Diesel Jeans.
Or is everyone walking around making in the six figures??
it’s all about image and style in this part of the world. me, i could care less. i’d rather have a fat bank account and enough cushion to deal with life’s curve balls. we live in an increasingly hostile and interconnected world where one geopolitical event can turn everything on its head. do you want to live by the seat of your pants trying to impress those who really don’t care about what you have or do?
In NYC, the averag 25 year old spends over $2,000 a month on clothes especially those $300 Diesel Jeans.
Where do you get this nonsense from ? Median FAMILY income in NYC is 45K.
You need a $250,000/yr salary to make it here and be accepted, anything less makes you inferior.
The vast majority of NYCers make considerably less than that.
NY’ers are judged by what they drive and what they wear. Everyone is so concerned about impressing others and living in the right neighborhood / driving the right car.
1) Not necessarily more than anyone else
2) In terms of cars, lots of NYCers I know (including some pulling in well above your $250K sum) don’t even have cars.
Anonymous said…
Is their any reason people need to spend $3000 a month in rent or more to live in the right neighborhood?
6/21/2006 01:11:38 PM
oh no! :(
I often hear “because we have a strong economy” as an excuse why housing prices won’t fall and everything will be just fine. What scares me is the fact that so many American’s are leveraged to the hilt in the best of times and under the best of economic circumstances. What happens when the economy does finally stumble? At least in 1933 there was a good excuse for negative savings.
Anonymous 01:10,
Could you let me know exactly which part of your ass you are pulling these numbers out of?
What are diesel jeans? Is that like leaded?
Pat
[Counting the number of pens in my pocket right now, and putting more tape on my glasses.]
Never paid more than $35 for a pair of jeans, and never will.
Note: some people are actually wealthy, with these expensive cars and big houses.
I think housing bubble and expensive cars go hand in hand.
Before the housing bubble, in mid 1990s, you could’ve bought a nice 3 bedroom house in most parts of NJ for less than $300,000.
When your house costs $300,000, you would never think about spending $50,000 on a car. But when your house is ‘worth’ $700,000, all of a sudden, that $50,000 Mercedes doesn’t seem so financially irresponsible.
What’s sad is that, you get so much more in a $20,000 car today than a similar car 10 years ago.
OTS:
I got a credit card bill (which hasn’t happened in maybe a couple of years for me) and I was very surprised to see the rate had gone up to 19.5%. I think the rate on it was 6.9% the last time I had a bill.
Is 19.5% about right for now? I would have guessed maybe 13, but not 19.5.
Pat
I came across a box that I had stashed away during my last move in 1996, and the items inside were wrapped in the real estate section of the day.
Nice 3BR 2BA tudors in Rutherford for $179K, lots of 2 families in the 200K to 229K range.
Prices have gotten so far out of whack in ten years.
jw
One thing that gets lost when talking about “$300 Jeans.” is that everyone has different priorities.
After socking away a good chunk of my net each payperiod, I spend my excess cash on music, CDs, going to shows, etc. To some this is a complete waste of my resources, but it is important to me.
However, when I needed a car last year, I bought a ’97 Subaru with low miles. It is a great car and should last forever. However, some people would not be caught dead buying/driving a used car. Again, it is all a matter of priorities.
I have some expensive jeans, but also have some clothes from Old Navy.
Unrealor makes a very good point, above. Take it from someone that is in retail…Do not underestimate the amount of people that want, and can afford, designer clothes and upscale brands.
Do you remember that line in “Silence of the Lambs” where Hannibal Lechter is telling Jody Foster that “we begin by coveting what we see every day.” Jeans?
There must be a gene for that I’m missing. I’m like unrealtor, only I think he overpays on the $35. I get mine on sale for $23.99.
Pat
Do you remember that line in “Silence of the Lambs” where Hannibal Lechter is telling Jody Foster that “we begin by coveting what we see every day.” Jeans?
Yes, if Jodie Foster is wearing them :-)
the real question for me with this data is whether Americans are really buying luxury with their housing and transportation dollars, or whether they’re merely getting by. For example, it is pretty difficult to get a decent car for under $15,000. When you consider this as a percentage of what the average person makes, it’s pretty high. Same goes for housing costs. Not sure I really buy the argument that most people are just wantonly overspending
“Before the housing bubble, in mid 1990s, you could’ve bought a nice 3 bedroom house in most parts of NJ for less than $300,000.”
In the early 1990s, there were quite a few Mercedes owners in Old Bridge (at the time about a $200K town), so some were out of control then as well, with a car worth 25% the vale of their house.
No, it seems people are more comfortable than ever especially those in the NYC / LI area.
Most spend all their money on clothes & rent. According the the latest Fed Report for the NYC area, purchases of expensive items are doing much better than lower cost items.
Spending a few thousand every month on clothes is routine for most NY’ers along with eating out every night at some $150 + restaurant.
The article stresses the point about percentages of income, but it carefully hides the forest for the trees.
Food/apparel expenditure IS much less of a percent of income than it used to be. OF COURSE IT IS.
Housing construction costs have gone up incredibly. We can’t outsource our houses to Malaysian sweatshops. The cost of growing food is now basically our farm subsidy, food is so cheap.
We tried to “outsource” part of housing costs by having illegal immigrants build those houses, but I guess that gravy train is about over.
Housing is like the one thing we use that can’t be globalized, so OF COURSE it is a greater percentage of our income DUH. [assuming income rises proportionately over the long run, relative to other economic variables.]
Argue with me.
Pat
skep-tic said…
Not sure I really buy the argument that most people are just wantonly overspending
skep:
Why not? I guess it depends on your definition. If people want to retire and live off of their accumulated wealth and benefits starting at roughly age 62-65 then YES. Note, many feel it is their G-d given right to retire at 55 with full pension.
This post has been removed by the author.
Pat:
Argue I will. Houses are bigger, more lavishly appointed and furnished. The houses are also filled with endless heaps of useless junk. Everyone needs to have a perfect lawn too. The problem is that things have become less expensive, however, expenditures have increased.
It’s the old stereotyped story about the spouse coming home from shopping with bags and bags of stuff. The other spouse gets angry and starts yelling. The first person responds “why are you so angry? Everything was 40% off, we just saved tons of money”
I did some research on consumer bankruptcy in law school and while the people who over-extend themselves by spending on discretionary items are more visible, they are a very small percentage of the people who end up bankrupt.
Most people who end up bankrupt have very few assets. Most of them are also employed. The point is that the flashy wannabes who lease Mercedes and buy $300 jeans are way more visible, but for every one of them there seems to be 9 or 10 people working crappy jobs with no health care who are on the verge of insolvency. It truly is very difficult for a large percentage of the population to meet basic needs even with a full time job.
Of course you need at least 100K to make it here, but most people who are single are making between $200,000 – $400,000 and have millions in net assets to their name.
I make $75,000, live in Queens and barely scraping by in a studio and a six year old car.
{{{Unrealor makes a very good point, above. Take it from someone that is in retail…Do not underestimate the amount of people that want, and can afford, designer clothes and upscale brands.}}}
Yeah, I am sure that the average Paris Hilton or MTV wannabe you see around NYC on a weekday can afford all the stuff that he or she is carrying. These are the ones who live in the East Village, Soho or Chelsea and spend $3,000 a month for a small one bedroom.
They never say what they do or where they get the funds for their $2,000 or $3,000 a month shopping sprees or how they can get 20% down for the average Manhattan or JC Waterfront Condo.
I am sure that they all stockbrokers, real estate gurus, or ‘E Millionaires’ but most likely trust fund slackers who always got what they wanted at the snap of their figures. Unfortunately, this type makes up most of NYC these days and us Native NY’ers absolutely despise them.
I have news for you: People with real earned wealth & income don’t feel this need to have to flaunt it and think that they are better because they have more things..
{{{Most people who end up bankrupt have very few assets. Most of them are also employed. The point is that the flashy wannabes who lease Mercedes and buy $300 jeans are way more visible, but for every one of them there seems to be 9 or 10 people working crappy jobs with no health care who are on the verge of insolvency. It truly is very difficult for a large percentage of the population to meet basic needs even with a full time job.}}}
Where exactly?? Certainly not in NYC..
And the Bankruptcy law was a result of this gross credit card overspending and entitlement mentality.
Bad thing is that it does not go far enough. Too bad many people feel it is OK to shirk responsibility for anything especially ones debts.
Anonymous 9:09, you have a lot to say, and so many “facts” yet you hide behind “Anonymous.”
You truly have no clue what you are talking about.
To assume that most people wearing the “$300 jeans” you are so obsessed with are Paris Hilton wannabees is just wrong. Besides, who would want to be Paris Hilton, anyway?
As I said, some people like to wear expensive clothing, while some don’t.
Some people spend $ on cars, while some don’t.
Some of us have lives, while some of us sit alone in our room, making ridiculous anonymous posts to this blog. Different strokes for different folks.
Nation’s debt burden commentary:
http://tinyurl.com/ezaof
Is this an isolationist view? Maybe dumping our spending spree bills into our children’s laps is O.K. if the rest of the world benefits.
Pat
For the record, Diesel jeans do NOT cost $300; they cost about $120. At least that was the price tag about a year ago. I’m not suggesting this makes them a bargain, mind you. That is still a lot to spend on a pair of jeans. But in the name of accuracy . . .
The same anon poster has been posting this same song and dance on several threads but never offers any data to back up his claims.
Personally, I do not believe that most of Manhattan, especially the 20-somethings, are spending $2000 a month on high-end clothing. I recognize however that there are people who can (and do) spend this much and more—but that is another point altogether.
Skep-tic, does the nephew lease the MB or did he actually buy it? The advent of leasing has put many of these high-end cars in the hands of people who otherwise could not afford them. Prior to leasing, you saw very few of these vehicles on the road. Now the roads are fairly cluttered with them (at least around here).
I have no data to back this up, but I’ll bet that 8 or 9 out of 10 high-end cars (BMW, MB, Audi, Lexus, etc.) are leased, not owned.
{{{Personally, I do not believe that most of Manhattan, especially the 20-somethings, are spending $2000 a month on high-end clothing.}}}
Then you haven’t been to Soho, Bloomingdales or Saks on an average Weekday (Forget about visiting on any weekend other than a Blizzard in January).
How do these people afford it anyway??
Is everyone in Manhattan a new age trustafarian or E Millionaire??
I also find that these people who shop like the above but don’t have the actual income in actual ‘Take Home Pay’ are the first ones to complain about everything stated in this original article.
I ask, just what do these people do?? I make about $75,000 a year and it is hardly enough eventhough all I could afford is a $800/month studio apartment in Flushing Queens.
People can (and do) spend like this because the attitude is ‘hey the other guy is doing it’, and because of the way our government & media romanticize debt.
People are just living paycheck to paycheck counting on or wishing on their raise or year end bonus to maintain their standard of living.
I cannot believe that the ‘portion of spending’ devoted to food, apparel and entertainment has fallen sharply..
Many people eat out every night, everything they wear is designer when you can find a nearly identical item at Target for a fraction of the price.
It doesn’t matter if a car costs $15,000 or $70,000. You don’t even need much of a downpayment and as long as you are working and have a decent credit score you pretty much can get financed for anything that you want.
Flushing Anonymous “I’m envious of anyone I assume has more money than me” Queen,
If you’re 20-something and make about $75k, quit bitching and keep working. You’re doing pretty well.
If you’re older and just envious of these people, seek counseling.
Cause this shtick is getting old.
There will ALWAYS be someone who makes more than you and someone who makes less.
Get over it already and try to bring something constructive to the Housing discussion.
Amen, Rich.
my money goes into my money market earning approximately 4-5% tax free
(fidelity in case you are interested) just waiting on the sidelines for the prices of real estate to come back to earth. anyone who makes 100k has no kids and lives paycheck to paycheck is not too smart with money
300 dollar jeans lol i got a bridge in bk for you
I ask, just what do these people do??
They’re in debt up to their eyeballs or living off a trust fund.
Appreciated your info. Thx.
Steve @
http://www.lifeincome.org
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