Major Changes Needed in U.S. Spending Habits

This article was originally published by Newhouse News Service on Thursday, July 7, 2005.

By Katherine Reynolds Lewis
c.2005 Newhouse News Service

We, the people of the United States, spend nearly every dollar we make.

The national savings rate -- personal savings divided by disposable income -- routinely dips close to zero, while consumer and mortgage debt spiral ever upward. A majority of Americans have less than $25,000 stockpiled for retirement, while many experts say a healthy nest egg is more than $500,000.

Some say we're a country of spendthrifts, splurging on designer clothes, Starbucks coffee and cable TV. But we're also spending dramatically more on the essentials of living than a generation ago.

"It's not about lattes and sneakers; it's about health care and housing," said Elizabeth Warren, Harvard University law professor and co-author of "All Your Worth: The Ultimate Lifetime Money Plan."

"It's not about pennies; it's about the big dollars," Warren said. "That's what's blasting the hole in the American family budget."

To really save enough for old age, experts say, we will have to buy smaller homes, make our cars last longer, take public transportation and adopt other radical lifestyle changes. And it wouldn't hurt to brew that coffee at home.

Compared with a generation ago and in dollars adjusted for inflation, Warren said, the average family of four spends 69 percent more on a mortgage, 90 percent more on health care, 100 percent more on child care and 38 percent more on taxes. Families actually spend 21 percent less on clothing than in the 1970s, 22 percent less on food, 44 percent less on appliances and 30 percent less on furniture. Even though families spend 20 percent less per car, the need for a second vehicle has boosted overall car costs by 58 percent.

While family income has climbed nearly 75 percent -- thanks to the great increase in the number of working mothers -- people have more than spent the extra money and gone into debt besides, Warren said. The situation has worsened dramatically in the past five years as wages and job growth stagnated while housing costs soared.

"We have overconsumed, and we have not prioritized retirement savings for a generation," said Dan Houston, a senior vice president at the Principal Financial Group in Des Moines, Iowa. "By the time you really get the wake-up call, it may be too late."

Nicole DelBuono, 35, a computer technician New Jersey, knows she should be saving more for retirement.

But after paying for utilities, the mortgage on her new home, two car loans and food, there isn't much left at the end of the month. DelBuono once took a class on budgeting and found it overwhelming.

"I wrote everything down and I hated seeing it; it stressed me out," she said. "I worry a lot about Social Security ending like they talk about. I just want to be sure that my children aren't stuck taking care of me."

She and her husband, Dan, have about $40,000 between their two 401(k) plans and a couple of thousand in the bank for emergencies. They owe about $29,000 on their automobiles, $2,800 in student loans and $5,000 on four credit cards. A home equity loan last year boosted their mortgage to more than they paid for the house.

Houston advises setting aside the necessary retirement savings each month -- 15 percent of income is frequently recommended -- and only then seeing what's left for housing, transportation and other necessities. You may find it's not enough for the house you want, or the one the realtor thinks you can afford.

Seventy percent of Americans expect to work into retirement to make up the shortfall in their savings, according to a survey by Prudential Financial Inc. in Newark, N.J.

But an injury, illness or layoff can cut short a career and force drastic spending cuts. Four in 10 retirees surveyed by Prudential said they were forced to stop working. Nearly half of them were younger than 60.

Marilyn Brenden, 56, was diagnosed with breast cancer shortly after being laid off as director of a homeless program. Cancer treatment left her too weak to take a new full-time job, and she couldn't risk losing her health insurance if she missed a payment.

"I wasn't worried about whether I would survive the cancer," said Brenden, who lives with her mother in Silverton, Ore. "The big question was whether I was going to survive the financial crisis."

She eliminated hair perming, coloring and cutting -- that is, when chemotherapy ended and her hair started growing back. She stopped buying makeup and clothes, relying on freebies and hand-me-downs from friends. She wore pants to avoid purchasing pantyhose.

"You have to learn to distinguish between things that are true needs and things that you just want that you don't need," Brenden said. "What's just an ordinary decision for other people, for someone who's poor becomes a major, major decision."

Susan Hand suddenly became the breadwinner when her husband decided to retire early from Motorola Inc. rather than be transferred by the company to Texas from North Carolina, where his children live. It was daunting to be in charge of three mortgages -- two homes and a boat -- and to need to save enough for her own pending retirement.

"What we were told at the time was, it's possible but it's going to be a stretch," said Hand, 52, a senior project manager for IBM Corp.

So, the couple made some major changes: They sold their house in Raleigh, thanks to IBM letting Hand telecommute from their Outer Banks home. They plan to make do with their cars for a decade or more instead of replacing them every two years. Both are on a monthly allowance.

It's hard to predict what might change to bring more American budgets into balance. One thing is clear: The current situation is unsustainable.

"Consumption as a share of income will be much lower in five years, but when the break turns, and how abruptly, is anyone's guess," said Lee Price, research director at the Economic Policy Institute, a labor-backed Washington think tank.

One likely scenario is an increase in interest rates, which have been near record lows for years. Then, people with credit-card debt, or adjustable rate or interest-only mortgages, will have trouble making higher monthly payments and will start to default on their obligations.

Nicole Lowe, credit education specialist at, a subsidiary of the credit-reporting firm Trans Union LLC, said it would be smart to refinance to a fixed-rate mortgage now, and pay down as much credit card debt as possible. Focus on your net worth, making sure your assets exceed liabilities. A small savings account doesn't do much good if you have a huge credit-card balance.

An abrupt shift could be catastrophic, experts said.

People in their 30s and 40s, the prime spending years, haven't experienced a serious economic downturn, said Dennis Jacobe, chief economist for the Gallup Organization in Princeton, N.J. Only 41 percent of those surveyed in June have an emergency fund, and 31 percent of those said the money wouldn't last as long as three months.

"There are not a lot of Americans who could afford to be out of a job for a long time," Jacobe said. "If we do at some stage have a significant recession, the pain is going to be a lot greater."