Spending $1.01 for every dollar brought in?
February 2nd, 2007 | by mbhunter |Last year saw the lowest US personal savings rate since the Great Depression. Negative one percent.
There were some months that we spent more than we brought in, so we haven’t been the best savers in the world recently. The national statistics are pretty grim: On average, Americans spent more than they made last year. So for every super saver that analyzes their Latte Factor™
Just once it’d be nice if the credit card companies forgot that we owed them. (Hah! Yah right.) They’ll remember, that’s for sure. The fiddler must always be paid one way or another. He won’t go unpaid forever.
But for the average American (average as far as these statistics are concerned), 1% overage in spending is pretty easily eliminated. On a $50,000 annual income, 1% is $500, which is a latte three or four times a week. Brew your own coffee and you’ve broken even.
To check whether you’ve spent more than you’ve made last year, compare your income and expenses. The focus is on spending habits:
- What would I call income? Paychecks, commissions, royalties, earned interest and dividends. Basically cash flowing in your pocket that you can choose to spend or not spend.
- What would I not call income? Unrealized capital gains. (If your house appreciated $50,000 last year, good for you, but this shouldn’t be added to your income.)
- What would I call an expense? Cash flowing out of your pocket or debt that is accumulated to pay finance charges (interest) or to buy goods and services that depreciate in value.
- What would I not call an expense? Unrealized capital losses (if you lost $10,000 in your stock portfolio’s value) or money used to buy into investments or pay down debt. The market’s gyrations are independent of your saving/spending habits.
This leaves out a lot of details but the basic idea is to compare what you earn from your efforts and what you spend on things that will be used up.
So if your expenses were indeed greater than your income, what’s to do?
- Find out what’s doing it. If your expenses were only a little bigger than your income, there’s probably one big soft spot. (For us, it’s that we dine out too much.) After that one’s patched up, you’re in the black, and you can go further in the black either by increasing income or decreasing expenses. If there’s a big discrepancy between income and expenses, there may be a bunch of soft spots that need attention.
- Fix the problem. Now that you know what the problem is, take care of it ASAP. (I pack my lunch more, brew more coffee in the morning for church instead of picking it up at Starbucks, etc.) For someone else it might be canceling $400 worth of magazine subscriptions that are rarely read. Or attack it from the other end and start a side business to pay for dining out or to pay for those magazine subscriptions.
The first step is relatively easy to do. The second step, I understand, is easier said than done, and everyone has a different set of circumstances to deal with. So I’m not meaning to scold anyone. “Fix the problem, not the blame.” 
So if you’re uncertain whether you’re spending more than you earn, I encourage you to check it out and take appropriate action.
11 Responses to “Spending $1.01 for every dollar brought in?”
By Mike on Feb 2, 2007 | Reply
That is a pretty scary trend. One way or another, that can’t continue. I wonder if we are just getting more irresponsible with our money because as a country we are poorly educated on how to manage it, or if the economic situation is just getting that bad. Probably both, I guess.
By Mike on Feb 2, 2007 | Reply
That is pretty scary. I wonder if we are just more irresponsible with our money these days or if the economic situation is really that much worse. Probably a little of both.
By Mike on Feb 2, 2007 | Reply
Sorry, didn’t mean to send that twice. Feel free to delete the first one.
By Foobarista on Feb 3, 2007 | Reply
Sorry to be a contrarian, but I can’t help but notice that this article is referring to the “personal savings rate”. The personal savings rate refers to after-tax savings, which means it doesn’t include 401Ks, flexible spending accounts, Traditional IRAs, SEP-IRAs, HSAs, or tax-deferred college accounts. (It does include Roth IRAs since those are funded with after-tax income.) I’ve also seen studies that show that this particular measure started going down in the late 1970s, when 401Ks and IRAs were introduced, and all of these devices have had their maximums raised greatly in recent years.
I know in my own case, my wife and I saved close to $50K in various tax-deferred accounts last year, so our “personal savings rate” wouldn’t look very good.
By Savvy Steward on Feb 3, 2007 | Reply
With a lot of Americans in credit card debt and other types of debt, I’m not surprised by this statistic. Even with before-tax savings vehicles, I bet many are spending more than they are saving.
By jpsfranks on Feb 4, 2007 | Reply
Whenever there is a post like this on a blog or a forum, there is an inevitable comment from someone who intimates that the savings rate calculation is archaic and is missing all sorts of assets or just includes deposits in passbook savings accounts or something.
This is incorrect. The Fed’s calculation is much more complex. It does include 401k and other tax advantaged accounts, for example (although considering the horrible statistics I’ve heard about the average American’s retirement assets, I doubt it has much impact).
It does not include unrealized capital gains, but as MBH suggested, that’s probably not a good idea/impossible to assess anyway.
So, IMHO this is a big deal and the nation cannot long continue it’s current spendthrift lifestyle.
Check out this doc for more info on what calculations the Feds use:
http://www.gao.gov/new.items/d01591sp.pdf
By mbhunter on Feb 4, 2007 | Reply
Thanks all for your comments!
Also thanks jpsfranks for the light reading.
By Aimee on Feb 4, 2007 | Reply
I have to wonder in this instance how much is really a “latte factor” overage. For a lot of people just meeting the needs of their family puts them over (just on neccessities) due to low incomes.
By ThisLittlePiggy on Feb 4, 2007 | Reply
Aimee, Sorry I have to disagree with you. While I’m sure that there “may” be some cases in that situation for the most part people consider “wants” a “neccessity” when it’s really not. Also there is the I want it and I want it now no matter the cost mentality.
By Foobarista on Feb 5, 2007 | Reply
OK - I stand corrected, although my “defense” is that numerous websites (wikipedia for instance) define the personal savings rate as disposable income minus personal expenditure.
That said, I generally don’t like “people are financially stupid” memes, since they often lead to dangerous “calls for government action”.
One thing that continues to be interesting: the report itself is at a loss to explain why net worth has run up impressively in the past few years while personal savings has tanked. There’s clearly something not well understood taking place, which is always scary.