Election rhetoric and global financial crises often drown out the challenge faced by many families of simply making ends meet. It can be a complicated mix of cultural pressures, personal priorities, discipline and financial literacy.
Ted Burdick, a young married civil engineer with an infant child, kept detailed spending records for six months. Ted and his young family spent around 20% of their income on rent, 27% on food and household expenses, another 5% on utilities and just under 7% on clothes. Their medical expenses were low, only 2% of their income, and they gave 1.5% to church and charity. Their transportation expenses were also relatively low, at only 2% of income, and Ted regularly contributed to an emergency fund. Ted and his wife often attended the theatre and musical events.
At the end of the first month, other realities came home to roost. Ted lost his job and received a whopping three weeks’ severance pay. By the end of the next month, Ted had found a new job with Proctor & Gamble at a significant 44% increase in pay and headed to Cincinnati. Ten days later Ted turned down another job offer from B. F. Goodrich that was for another 25% higher salary. But he had already moved his family and honored his commitment to P&G.
Despite the higher salary, the transition had plenty of difficulties. Ted had to borrow nearly a month’s salary from family to meet his expenses while between jobs. His rent went up nearly 30% in Cincinnati but that was for a four bedroom house rather than the small apartment he had in New York City. The travel and moving costs to Cincinnati were than a month’s income.
While Ted’s overall experience is typical (except for the new job at much higher pay), some of the details may seem a bit unusual. The year was 1919, and Ted Burdick was the grandfather of Mike Burdick, a principal of Gordian Advisors. These records were found in the personal papers of Ted’s son, who recently passed away.
Incomes and salaries grew faster than inflation until the most recent ten years, and Ted’s $2,700 annual salary in 1919 would be over $165,000 today. (At the time, he earned 2½ times the average worker’s salary, and adjusted for inflation alone it would now be only $35,000.) The house in Cincinnati, built in 1910, is now valued by zillow.com at $223,400. While there was an income tax in 1919, the rate for Ted’s income level was only 4%, and Social Security was not introduced for another 16 years, so Ted “took home” more of his pay.
It is interesting to see how the details of Ted’s expenses compare to today. Ted and his family did not own a car and took public transportation everywhere, while his telephone expenses were negligible at less than 1% of income but stamps and postage were nearly as much. Ted did pay for life insurance but there was no such thing as health insurance; even with several visits to the doctor the biggest medical expense was arch supports for his wife’s shoes.
According to the Bureau of Labor Statistics 2010 Consumer Expenditure Survey, the average family spent 34% of their income on housing, 16% on food and household supplies (food away from home is 5% of incomes and is remarkably consistent at all income levels), almost 8% on utilities and only 3.5% on apparel. Electricity usage is much higher and telephone and communication services alone are 2.5%. Transportation is 16% of incomes, with over 5% going to vehicle purchases and only 1% going to public transportation. Health care spending is 6.6% of incomes on average, with more than half that amount for insurance costs.
The biggest difference, though, is in consumer debt. Other than a collection of Mark Twain volumes and a vacuum cleaner for the Cincinnati house, both of which were bought “on time” over a year or two, Ted and his family had no debt at all. Excluding mortgages, consumer debt payments are over 5% of disposable income and have been for over 30 years. Those debt payments peaked at over 6.5% in 2004 and 2005, corresponding with a low savings rate of 1%. In other words, consumers sacrificed saving in favor of much higher debt payments. The savings rate has recovered somewhat to over 4% as consumers have been trying to lower their debt over the last several years.
The combination of available credit, the rise of instant gratification and poor financial literacy contributed to greater consumer debt. In their 2011 survey, the National Foundation for Credit Counseling found that over 40% of adults gave themselves a grade of C or worse on their knowledge of personal finance. More than half don’t bother to track their expenses and almost 60% are still spending more than in the previous year. Most adults have not reviewed their credit report or credit score in the last year and 40% carry credit card balances from month to month.
There are many simple steps, many of which are reflected in Ted Burdick’s experience, which can help make ends meet in any circumstance. Make a habit of “paying yourself first” through regular forced saving. Be very cautious about taking on debt, especially debt which cannot be easily eliminated with regular income. Make a conscious effort to distinguish between needs (housing, clothing, food, education, health care, transportation) and wants (larger houses, latest fashions, dining out, unhealthy lifestyles, late model cars). Be creative so that life is still full of enjoyment; for example, home-cooked meals with friends can satisfy a love of fine food without the cost of dining out.
The ultimate goal is to enjoy life with a sense of accomplishment and less financial concern than to have that enjoyment diminished by the burden of financial stress.