America is built on its middle class, the brass ring of upward mobility we all reach for, but it seems we’re abruptly waking up from that dream. Some facets of the economy – like housing – are showing signs of life after a prolonged national recession, but it leaves us wondering what the average person’s financial situation will look like going forward. And how does our middle class compare to a generation ago?
In the past, I noticed a common perception that our financial difficulties were, in large part, due to our over-indulgence. We were a nation of rabid consumers who simply couldn’t afford the luxurious lifestyles we'd chosen. Some of this was true - people claimed to have "financial hardships" while they owned boats, expensive luxury cars, huge new houses, took grand vacations, and basically live a lifestyle based on debt, not the ability to afford it. Yes, we need to tighten our belts, but there are also a lot of economic factors that point to the gradual disappearance of the middle class. So are we really spoiled and entitled - or are we just being squeezed?
Research shows a profound redistribution of wealth in this country. We are definitively moving toward a two-class system of "haves" and "have-nots," where the middle class is shrinking. Some even argue that the notion of the American Dream is extinct. The phrase "American Dream" was coined by historian James Truslow Adams back in 1931, which he described as "a better, richer, and happier life for all our citizens of every rank...each generation has seen an uprising of ordinary Americans."
To truly illuminate this shift in economics one only has to look at the financial reality of the average middle class household one generation ago, say in 1970, and a household today. You would think we spend more, have more, waste more, and over-indulge; designer clothes, fancy houses, luxury cars, lavish restaurant meals and vacations, but the reality is quite startling.
First, there's been a huge social shift in the household dynamic since 1970. These days most households include two working adults, while in 1970 the average scenario included the man bringing home the bacon and the woman frying it up in the pan. So even though we have much more income because two people are providing, somehow these days we have much less at the end of the month. This leaves us on a financial tightrope without any safety net below us. It takes two incomes just to squeak by so if one person suffers a layoff, medical disability, or similar financial problem there is no room on the budget to compensate for that loss. The precipitous rise in divorce rates have resulted in more single family households since 1970, where one income has to pay the same bills. This is financially crippling and usually results in a mother or father moving down the economic ladder, not up (a single mother is three times more likely to file bankruptcy than the average person).
Here is a rundown of median household expenses compared to 1970. All dollar amounts have been adjusted for inflation so this is an accurate dollar for dollar comparison.
We spend LESS on:
Clothing: 33% less. Overseas manufacturing, online shopping, and discounted stores (like my favorite - Marshalls) have dropped prices.
Food: 23% less. Feeding a family has become less expensive due to narrow profit margins, warehouse clubs, and discounted grocery chains.
Home appliances and furnishings: 51% less. Don't let the stainless steel fridges, microwaves, and nice furnishings fool you - manufacturing costs are way down and durability is way up.
Fixed costs are RISING:
Median housing costs: up 76%.
Health insurance: up 74%.
Taxes: up 25%. We now have two incomes that Uncle Sam wants to be paid on.
Car expenses and maintenance: up 70%. Two people driving to work means two cars in the driveway and all of the expenses that go with them.
Education and Child Care: up 114%. Preschool and daycare costs are now a huge part of the budget that didn't exist back in 1970 with the stay-at-home mom. The cost of a college education and student loans has also exploded.
Debt: up 92%. The prevalence and over-use of credit cards, mortgage equity loans, and lines of credit have created a huge glut of debt we are servicing with monthly payments at a very high interest rate over a very long time.
We spend a little more on:
Home entertainment: 23% more. We now feel it's almost mandatory to pay for internet, Tivo, cable, etc. To put it in perspective, most of these entertainment options didn't exist in 1970 and we're only talking $180 or so more per year.
Travel and vacations: 19% more. The airline industry's rising prices and more expensive vacations (ever go to Disney Land?) cost the average family more per year.
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So, if many expenses are less than a generation ago, and we make 70% more money per household, what is it that's hurting us? Based on these numbers, we can conclude that fixed costs are eating up our discretionary income and actually account for 75% of the average monthly budget. If, indeed, the middle class is sinking, then now more than ever it’s important to manage our finances correctly.
If you’d like more information, or some tips on staying financial good health, feel free to contact Blue Water Credit for a complimentary consultation.
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