According to the Pew Research Center, as of 2014, 51% of American adults lived in middle-income households. The median household income in 2014 was $53,657, according to the Census Bureau.
To put this in perspective, half of all American households live on less than $53,657. Remember, these are households, not individuals. It can be a husband and wife who both work, a single mom, a multi-generation home, and many other scenarios. The point is, in today’s America, $53,657 doesn’t go very far, even if you’re single with no children. Taxes, rising rents and home prices, student loan payments, credit card bills, and many other things are jockeying for your hard-earned dollars and for many of us average Americans, there only seems to be just enough of those dollars to get by.
If we stay on our current path, the outlook for the future does not look any better. With rising prices, high spending rates, lack of savings, and love of credit, whatever financial cushion we currently have, may not be enough in the years to come.
There are financial forces that are affecting the average American and impeding their ability to get ahead. I have alluded to some, but here are my top 6 reasons why the average American feels stuck:
1) Retail Therapy
I turned 31 last October. Other than feeling old as shit all of a sudden, I am fortunate to live in such a transitional period of time. Many technological advances, industries disrupted, and plenty of shiny new things to spend our money on.
Retail therapy has been around for ages, but it now seems uglier and with a gloomier shade of envy mixed in. Everybody wants what everybody has and they want it now. Instant gratification feels great doesn’t it? I think so. Don’t have enough for the new iPhone that costs $999? No problem. Just pay the sales tax and $40 per month for 2 years.We no longer ask how much things cost. We ask how much down and how much per month.Click To Tweet
What has failed to register when we buy something on credit is that we are trading future dollars for gratification today. You are basically robbing your future self to pay for something today.
But spending money feels so good…
Shit! My future self is going to hate me after all the money I spent this past summer. I’m in no position to tell others how to live their life, but I have seen what works and what doesn’t in my life. Based on my experience, I’d rather hit that bump in the financial road with a fat piggy bank.
The one tip that can benefit everyone is to do a monthly budget and actually monitor your expenses. It’s amazing the things you will come to find out. For example, I am a Starbucks fan and I do frequent them often, but I had no idea I was spending $200-$250 per month there. That’s a lot of iced coffees and croissants.
If you’re like me, do your future self a solid and skip that second iced coffee. Who knows, your future self might actually be able to afford to travel the world and retire as a result of your decisions today.
2) Credit Cards
Not only did I overspend this past summer, worst of all, I charged it to my credit card. I have been trying really hard to pay down my debts, but there are times that the appeal of buying something today and not having to pay the consequences immediately is too difficult to pass up. After all, we’re all human.
I’m sure that I am not alone here. Credit cards suck. But, I still have about 3 or 4 in my wallet “for an emergency.” Then there is a trip to Playa del Carmen that was planned in the middle of summer, but the bank account is a bit low, so there’s my Amex to the rescue.
In 2015, the average American household had about $15,310 in credit debt. That’s another few hundred dollars per month depending on the interest rate. Many offer 0% for a year or two, but when that ends, consumers are looking at 12%-19% rates or more.
Do yourself a solid and ditch the plastic. As the popular personal finance guru, Dave Ramsey says, perform “plastic surgery” and cut them up. I think I will.
3) Housing Prices
The rising cost of home prices is a double-edged sword. Sure, it’s awesome to see the equity rise on the house you own. Plus, it is a great hedge against inflation. On the flip-side, things aren’t so peachy. With home prices rising double-digits in many markets, and medium household incomes rising about 1% per year, many worry whether home-ownership is even a reality.
Even in my historically modest housing market of Dallas-Fort Worth, we have experienced double-digit increase in prices, which was unheard of before 2010. As I write this, I’m checking the Case-Shiller Home Price Index for Dallas Metro data which shows a 9% increase in prices versus last year. That’s an extra $18,000 each year for a $200k home.
The kicker is, as home prices rise, buyers turn into renters, and subsequently, rental rates begin to rise. As rental rates increase, real estate becomes more attractive to investors since higher rental rates equal higher ROI’s (Return on Investment). In turn, more investors compete with individuals on homes, driving prices even higher, and the circle continues.
Regardless of your politics, the impact of taxes on the monthly budget is a very real thing. For my purposes, I just care about the math. Since most Americans in the middle-class work for a living, they receive a paycheck, so taxes are usually deducted already, so they don’t feel it as much.
For example, I file as a single person. Since I make more than $37,451, but less than $90k, most of my income is taxed at 25%. That’s a huge chunk! Keep in mind, that doesn’t include, Social Security tax, Medicare tax, state income tax, sales tax, etc.
There’s really not much you can do about taxes other than electing individuals that will work to provide tax relief to the middle class. Until then, taxes suck, but we still have to pay them.
5) Student Loans
It seems that student loans have become a prerequisite to getting a degree. My lucky number was $20,000. That’s only because I worked part-time throughout college. I don’t even want to imagine having to pay back $100,000 or worse, $200,000. For my measly $20k in loans, my monthly payment is about $300 per month. Imagine the payment on $200k. It literally makes my stomach hurt.
Things have worsened so much that banks now offer 25-year repayment plans. Lucky you, you can now have your student loans extended and hopefully paid off by the time you are almost 50 years old. That’s assuming you don’t have any setbacks such as a layoff or health issues. It’s pure insanity.
I believe that student loan debt is the next bubble. Student loan debt has surpassed the one Trillion dollar mark and I fear it’s just a matter of time. What did you really expect? We allow 18-year-olds to make decisions about which school to attend which sometimes means hundreds of thousands of dollars over 5 years (average time to graduate). Then, we allow them to borrow basically unlimited amounts of money in the name of education and expect everything to work out.
I don’t know about anyone else, but I was pretty freakin’ stupid at 18. Fortunately, I had good parents who encouraged me to make good decisions, so I chose a quality in-state public school which was much more affordable than others in the area.
A decade after graduation, most of these young adults remain saddled with student loan debt. Their only solace is that they are actually using their acquired degree in the real world.
In case you’re curious, as am I, the average balance for individuals who took out student loans was $48,986 as of 2015.That’s a big payment. Just under $600 per month (using a 10 year term @ a 7% rate).
6) No Savings
According to the U.S. Department of Commerce’s Bureau of Economic Analysis most recent data for June 2016, the personal savings rate was 5.3%. Do you recall the small financial cushion I mentioned earlier? This is it. A measly 5.3%.
To make this number more meaningful, let’s looks at the median household income of $53,657 from the opening paragraph. The average American household is currently saving 5.3% or $237 per month. That’s $237 for emergencies, sudden car repairs, college saving for their kids. For many, they would love to see $237 left over at the end of the month.
The fear that arises from such a small financial cushion is that any small life event can completely dissolve those $237 and then some. The single biggest thing you can do is increase that gap and build up your savings.
The math is simple, but the execution is difficult. You can either increase your income or decrease your expenses. In reality, that means a part-time job or doing freelance work, or simply spending less.
I do not subscribe to the victim mentality. With the exception of those who are physically or mentally unable, you can change your behaviors and circumstances by making better decisions about your personal finances. No one is coming to the rescue. It’s up to you.
Things happen to us that are out of our control. We don’t control housing prices. We have little say when it comes to taxes, inflation, gas prices, and so on.Don't let the things out of your control make you a victim.Click To Tweet
Yes, they cost you money. No, life isn’t easy. Focus on what you can control. You can decide where you spend your money, what you buy, how much you save, how much you borrow.
If we don’t take control of the financial wheel now, the future might get a little bumpy. Life is getting tougher. We need to be more self-dependent than ever. The days of working for a company 30 years and retiring with a pension are over for most of us. It’s up to us to create a solid financial foundation where we can build from.
I don’t know what I’ll be doing in 10 years, but I will begin taking baby steps towards something better. Even if that means one less iced coffee and croissant. Plus, I have two awesome kids that depend on me. I’d love to leave them something other than debt and the Playa del Carmen bill.
With all that optimistic stuff out of the way, I leave you with this quote from P.T. Barnum:
“Money is a terrible master but an excellent servant.”