Borrowing Our Way to the American Dream
My leafy, little neighborhood in Fairport, NY could be the poster child for the middle-class American dream. Located within the village limits, in walking distance of three public schools, the streets are lined with well-kept homes, the garages of which contain late model SUV’s and sedans. Free-range children can be observed riding their bikes, playing games and rolling down the streets on scooters and skateboards.
Were that our only reference point, we might conclude America’s middle-class is thriving. Unfortunately, it’s not. It’s shrinking according to a Pew Research report. There’s good news and bad in their report. Yes, the middle-class is shrinking (bad news). However, more families are moving up than down (that’s good, right?).
The report uses family income as the criteria for defining middle-class. You are middle-class if your family income is between two-thirds (about $54,000 for a five-person household) and double the median annual income ($162,000) according to Pew.
Income is one way to look at economic status. But Pew’s report ignores net wealth. Think of it this way: who’s more secure? A family of five with an annual income of $100,000 and $50,000 in savings or the reverse?
And then there’s debt. Americans are borrowing heavily to maintain their middle-class lifestyles according to the Wall Street Journal. Many families take seven-year auto loans to afford an average new vehicle cost that exceeds $32,000, often leaving them in the predicament of needing to trade-in an aging daily driver before they’ve paid off the loan. No worries, though. You can simply roll your balance due into the next car loan. At the same time, debt to equity ratios on home mortgages now equal pre-financial crisis levels. And, credit card debt exceeds $1 trillion for the first time since the Great Recession.
Hedge-fund investor Ray Dalio has analyzed the split between the Top 40% and Bottom 60% of income earners. The Top 40 earn, on average, four times the average of the Bottom 60 and have ten times the wealth. This spread has grown over the last 20 years as manufacturing jobs have disappeared and the mix of household assets and liabilities have changed. The Top 40% are more likely to own tax-advantaged real estate, stocks and bonds while the Bottom 60% are more likely to incur expensive student, auto and credit card debt. So, over time, the split grows wider.
Maintaining a middle-class lifestyle has become more expensive while incomes have not kept pace. And, I haven’t even mentioned the impact of rising tuition and healthcare costs. We learned a hard lesson in 2008. Sooner or later, borrowing more than we can afford to repay will lead to financial ruin.
How will that impact our leafy suburbs?
Error Reduction and Human Factors Specialist FAA Accredited Training Provider, FAASTeam Lead Representative
5 年Great article, John. This is a serious situation and needs to be widely broadcast. Perhaps the middle-class lifestyle is still affordable with responsible money management. It is very easy to just lay down the credit card or enter it online. Very few people take the time to calculate how much interest they are paying and what percentage of their income that really is. Excess personal spending drives the economy but takes a personal toll when the reality of debt eventually hits home. I have been counseling young adults to "Just say no" when something is desired by not essential. The daily six-dollar coffee shop drink effortlessly purchased with the tap of a phone or swipe of a card seems free but adds up quickly. Is it essential to always have the latest smart phone as soon as it is released? Could a thirty-thousand-dollar car financed for five years serve the need rather than a forty-five-thousand-dollar car financed for seven years? The list goes on. People are generally smart enough to manage their money. They just need awareness.
Don't forget the national deficit and debt.