Why American Workers Struggle to Save Money?

Why American Workers Struggle to Save Money?
Did you know middle-class life is now 30% more expensive as compared to 20 years ago? This is mainly due to the increase in the cost of such items as college, child care, and housing. On the income side of the equation, salaries have largely stagnated and just don’t go as far as to cover these additional expenses. However, this is not the whole story.Americans used to save money. In decades previous, the bottom 90% of households were able to save 10 percent of their income during the first Reagan administration. However, by the year 2006, this savings rate went the opposite way to a whopping negative 10 percent. It is not just Americans that are struggling. The personal savings rate has fallen in other developed countries such as Canada, Germany, and Japan.So why the sudden change?Well, it was not so sudden. While doing some research on this topic, I came across an article and theory proposed by Derek Thompson called “Why Don’t Americans Save More Money?”. Excerpt from the article – Why don’t Americans save money (considering they used to in previous years)? Complete answer to this question would have to take into account the following:
  • Since the issue of a lack of savings is relatively new (within the last 20-30 years), the cause would be more recent.
  • The decline in savings among rich countries is global so it could be assumed that the cause is global.
  • Since America’s poor and middle class are exceptionally ill-prepared for retirement, there must be something unique about America in this regard.
This article presents several theories as to why Americans now struggle to save nearly anything at all and are not at all prepared for retirement.

Income And Expenses Changes In The Last 20 Years

While theories are interesting to ponder, the main point really comes down to this: income and expenses. How have they changed over the last 20 years?

1. Income stagnation

Accounting for inflation, the wage of the average American is roughly the same as it was 40 years ago. The paychecks may appear larger but they have mostly kept pace with inflation. There was a strong correlation between Americans saving money and the growth in American income. Following the economic slowdowns of the 1980s, incomes began to stagnate. Due to rising expenses and less money to go around, it became more and more challenging to save.

2. Rising Expenses

Credits to howmuch.net for the image. It’s no mystery that things become more expensive each year. The American dollar has less power now than it has had in the previous 20-40 years. Purchasing power is down.Not only is the dollar weaker but key items have continued to become more and more expensive. Take for instance your average American home. According to the Bureau of Census, in 1999 the average home price was $193,900. If you use an inflation calculator, the price in 2019 should be $298,774.But it’s not! The report states that the current average is actually $377,200 which is 26% higher than when accounting for inflation only.

What can we do about this trend?

With all critical expenses on the rise and incomes remaining stagnant, it can seem hopeless if you want to get ahead. However, even in this environment, there are people that are still saving money and getting ahead. Some of them are even retiring early.So, what is the secret?

Rethink American Consumerism

Consumerism is a large part of American culture. “Keeping up with the Joneses” culture is everywhere.If you’re someone who is really trying to get ahead, rethink your purchases, especially your status purchases. Things like clothes, phones, cars, etc all look great when they’re brand new. Who doesn’t want to show off their brand new iPhone after they get it?The problem is that all of these things are liabilities and they all lose value starting at the moment we purchase them. That new iPhone may cost $1,000 brand new but you will be lucky to get $100 for it in 3 years. Consumerism is expensive and in a country that is geared towards spending money, it is definitely something to rethink.

What you can do about it?

Wait until you really need an item before you go out and purchase it and purchase what you need – not what you want.For instance, I am still using the same old iPhone I’ve had since 2015. Sure, I’ve replaced a battery and a screen at this point but the phone has been paid off for years. It works fine and costs no additional money per month to keep.When I do replace it, I doubt it will be with the best or newest model. As long as it fits my needs for work/life, it should work fine.

Rethink the American Home

In my post: Why You’ll Never Do as Well as Your Grandparents: Embracing the Silent Generation’s Thriftiness, I brought light to an interesting trend in America starting in the 1950s and on. Our homes started growing. In the 1950’s, the average home since was 983 sq/ft. Today, the average home size is 2651 sq/ft. That is almost three times the size!The funniest part is that today’s homes actually hold less people! The average-sized family in 1950 was 3.5 people per household. In 2018, it was 3.14 people per household. Why do we need all of this additional space? Considering that housing is a large part of our expenses it would be wise to rethink what you will actually need and use vs. what you want.Most of us want a large home with several garage bays and large backyard. However, if your finances don’t allow for it, this may not make sense. Purchasing a smaller home/staying in an apartment that can easily be afforded is a wiser and safer option.In the event of a job loss or decrease in pay, you will be safe and less stressed. It will be easier to save and pay down debt. Overall, this is a huge win that leads to more stable and satisfying life.

Rethink Higher Education

One of the other large line items in the American expense budget is higher education. College becomes more and more expensive each year.Since the 1980s, the price of college as been dramatically rising.This huge increase in expense is at the core of the student loan debt crisis. As families try to desperately provide their children with the education they need to get ahead, they pile more and more debt on.Fortunately, there are other options available now.

What you can do about it?

If you are someone completely set on going to college or sending your child to college – consider a state or public university. State schools tend to be cheaper than a private university and offer a similar experience.While you may not get the fancy college name to put on your resume, i.e: “I went to Harvard..”, I can tell you that after the first job – employers really don’t care where you went to school. Things like practical work experience and skills are far more valuable. Consider a more economical college option and it can save you thousands of dollars.On a related note: With the increase in college attendance, trades have gone by the wayside. Due to a lack of tradespeople to replace those that are retiring, there is a huge demand. Not only that, but it is often much easier to get a high paying job with very little upfront expense.If you are someone who is trying to avoid student loan debt and wants to make a guaranteed steady income, consider a trade.ConclusionIncomes are not getting higher and expenses are definitely not getting lower. However, if you are smart with your money choices, you can save thousands and lead a much more comfortable life as compared to the large majority of Americans living on a razor’s edge – one paycheck away from bankruptcy.
David Carr (Wealthlenial)
David Carr (Wealthlenial)

Wealthlenial is operated by David Carr, who works as a Speech Pathologist by trade. He also enjoys entrepreneurial pursuits such as blogging, real estate investing, and Amazon FBA.