Money burning a hole in your pocket?

By Don Kuehn

There used to be an old saying that "money burns a hole in your pocket." It applied to people who couldn’t control the spending urge. For most of us these days, the money never makes it into our pockets before it’s spent. And a lot of it is spent on things that even a decade ago we didn’t think were very important.

You’ve read it here before and probably heard it in the popular media: Americans are not saving enough and, in fact, are spending more than they make. As recently as the early 1980s, we were saving more than 10 percent of our take-home pay. Savings have decreased steadily since then, reaching negative territory in 2005, according to the Commerce Department. Why? Well, to pick up on a point in an earlier column, it isn’t just the high cost of living, it’s the "cost of living higher" that’s killing us.

It is not a paradox that while savings have dipped into negative territory, the net worth of the typical family has actually increased.

That’s due to two factors: the rising equity in housing (for the 68 percent of us who own our homes) and positive returns in the stock markets (for the 55 percent who have a stake in the markets either through stocks or stock mutual funds).

People see the value of their assets grow and think that gives them license to spend beyond their paychecks. Some experts believe that a feeling of prosperity creates a "wealth effect" that is at least partly to blame for the low savings rates.

Home equity and stock profits, you see, are paper fantasies that exist only when they are "realized"—i.e., when you sell your house or stock funds and actually reap the gains you thought you had. Until then they are what’s known as "unrealized capital gains."

The Pew Research Center conducts a lot of surveys every year. In late 2006, one of the questions it asked was whether respondents earned enough to afford the lifestyle they want to lead. Under half (46 percent) said they do. Among the rest, most were optimistic about the future. Only 18 percent were pessimistic about their ability to afford the life they think they’ve earned (or they have really high expectations about how they want to live).

According to Pew, "…when survey respondents are asked to put in their own words the biggest problem they and their families face, financial concerns dominate the list."

The number of things we "can’t live without" has multiplied in the Pew "Luxury vs. Necessity" survey over the past decade. Take, for example, the microwave oven, which 68 percent said was a necessity, more than double from 32 percent 10 years ago; or home air conditioning, which jumped from about half of all respondents in 1996 to seven out of 10 respondents today (in 1973 it was considered necessary by a scant 23 percent).

Significant majorities of respondents thought television, car air conditioning, a home computer and cell phones were absolutely necessary to their life today, all up from 1996. New on the list of necessities in the past decade were high-speed Internet, the flat-screen TV and the iPod. Can granite countertops and instant messaging devices be far behind?

As the Pew folks quipped, "invention is the mother of necessity." Throughout history, from the wheel to the automobile to the computer to instant messaging, inventions have created their own demand—and eventually their own need.

So, what expenses do Americans have the most trouble affording? The big-ticket items in the budget are hardest to pay for. Sixteen percent say they struggle with home and housing costs; 11 percent think their car payment is too much for them; bills and utilities burden 10 percent. Items showing less stress on the budget include medical costs (6 percent), children and schooling (5 percent), and food and dining out (3 percent).

Think about it: Every one of these expenses, to some degree, is controllable. You can downsize your house, buy a smaller car, cut dining-out costs and make better decisions to lower expenses.

But when asked where they were most likely to splurge and overspend their budgets, folks in the Pew study cited three kinds of costs that they let get out of hand: food and dining out (25 percent), entertainment and recreation (17 percent), and shopping and personal (15 percent). Again, all are discretionary.

Americans are unwilling to give up on growing their lifestyles, even in the face of depressed wages, vanishing pension plans, questions about Social Security and rising healthcare costs. Failing to adjust to changing realities drives families to outspend their incomes.

The key to saving and investing for long-term goals (like retirement) is to get out of debt and capture every available dollar. Build an emergency fund equal to six months’ take-home pay and then start an investment plan beginning with no-load mutual funds. You’ll never get rich just working for a living—but that’s the topic of next month’s article.

If you want to read more about America’s saving and spending patterns and opinions, go to the Pew Web site at www.pewresearch.org.

If you are looking for ways to cut back and make ends meet, I suggest you start with a list of these areas Pew surveys have identified as places most people spend their discretionary money:

Cable or satellite television (78 percent)

Cell phone (74 percent)

Internet service (65 percent)

Tuition (25 percent)

Health club or sports facility (21 percent)

Landscaping or lawn service (19 percent)

Housecleaning (16 percent)

Child care (13 percent)

Alimony or child support (7 percent)

Now, I am not suggesting that alimony and child support are discretionary items in a budget. On the contrary, I think they may be among the most important obligations one can have—more important than one’s own housing, certainly more important than cable TV or a health club membership. But come on. If you are really living close to the financial edge, don’t you think you can cut your own lawn or clean your own house? Even take on a second job?

The Consumer Credit Counseling Service recognizes that budget limits vary from one person/family to another, but trying to keep your expenses within the following broad ranges (as percentages of your take-home pay) are good targets to shoot for:

• Housing—20-30 percent

• Utilities—4-7 percent

• Food—15-20 percent

• Transportation—6-20 percent

• Medical—2-8 percent

• Clothing—2-4 percent

• Savings and investments—5-10 percent

• Creditor payments (including credit cards)—10-20 percent

• Personal/miscellaneous—5-10 percent

If you study these lists, you may find other places where cutbacks are possible and appropriate in your budgeting process. You do have a budget, don’t you?

It might be an adjustment to give up cable or your cell phone. But we’re talking about money here … your money. Don’t let it burn a hole in your pocket.