It was once easy for people to live within their means.
Our parents and grandparents may have earned a low income by today’s standards, but they
were able to buy a lot more with it than many people can buy with their income today.
In a 2016 article, Guardian finance editor Patrick Collinson shares some family experiences
to demonstrate this point.
Back in the 1960s, his father was able to raise five children on a salary that is the
equivalent to £25,000 or $32,807.50 a year.
His mother was able to stay at home to take care of him and his siblings.
Furthermore, his father was able to buy a house, a television, and a car entirely from
his earned income.
In 2016, Collinson’s daughter also made £25,000 or $32,807.50 a year, but she did
not live as well as her grandfather did.
For housing, she lived in a “room in an ex-council flatshare” instead of owning
her own home.
She could not afford to keep her car and could barely “keep ahead of the bills every month.”
And she is not alone.
According to a World Bank press release, “almost half the world’s population – 3.4 billion
people — still struggles to meet basic needs.”
What happened?
Why does it seem like so many people will be poorer than past generations?
Like Collinson’s daughter, many people around the world are paying higher cost-of-living
expenses than past generations.
Take housing as an example.
Collinson notes that the cost of homes in the area of London where his father bought
his house has gone through the roof.
He observes that “houses in Rise Park, Romford, now sell for £400,000 to £450,000 [$525,560
to $591,255], or nearly 200 times the £2,400 [$3,153.36] my father paid when his home was
built in 1956.”
Collinson’s daughter would not be able to afford to buy a home that expensive on her
meager salary.
In Collinson’s words, it would be “an unimaginable prospect” for her to make a
down payment on a house because it would require her to “find £40,000 to £50,000 [$52,556
to $ 65,695], or twice her annual gross pay.”
In contrast, her grandfather “had to pay a 10% deposit, or £240 [$315.34], equal to
a fifth of his annual wage” when he purchased his home in the 1960s.
Another country where housing prices have sharply increased over the years is Australia.
Macquarie University researchers Peter Abelson and Demi Chung conducted a study of housing
prices in Australia from 1970 to 2003.
In 1970, the annual median house price in Perth was $17,500 , while it was $12,800 in
Melbourne.
By 1990, the annual median house prices in Perth and Melbourne increased to $101,125
and $131,000 respectively.
And by 2003, the annual median house prices had doubled in these areas.
In Perth, the annual median house price was $205,000, while it was $276,000 in Melbourne.
One Australian insurance company points out how housing prices over the past 30 years
have increased to the point that they have outstripped average income in Sydney, Australia:
“In 1985, the median price for a detached house in Sydney was about $73,000 Australian
Dollars, or roughly three-and-a-half times the average yearly earnings at the time.
In 2015, the median house price in Sydney is over $900,000 – around 11 times the average
annual earnings.”
With the rise in the number of two-income households, raising a child is another cost-of-living
expense that has become more costly than before.
In New Zealand, for example, the costs of care and clothing for children have significantly
increased in a relatively short period of time.
According to a 2019 New Zealand Herald article, “cash-strapped Kiwi parents are spending
almost twice as much raising kids as they were five years ago.”
New research finds that the “average spen[t] on the three biggest rising costs - childcare,
footwear and clothing - is estimated to be $5028 New Zealand dollars per baby this year
compared to $3034 in 2013/14.”
Other data from the Bank of New Zealand (BNZ) indicates that the cost of raising a child
in New Zealand could be even higher.
Last year, BNZ “estimated the cost of preschool care per child was $8750 a year for one child.”
The World Economic Forum recently named New Zealand as the country with the most expensive
childcare.
World Economic Forum Senior Writer Sean Fleming states that “based on 2017/18 data, a couple
with two young children earning the average wage have to devote 37.3% of their pay to
childcare” in New Zealand.
Another country that made the World Economic Forum’s list of countries with the most
expensive childcare is the US, which has childcare expenses accounting for 33.2 percent of a
couple’s average salary.
Parenting website Fatherly provides a detailed breakdown of these expenses.
According to Fatherly, it’s not food, housing, or transportation but childcare costs that
are “busting family budgets the most” in the US.
Statistics provided by Fatherly show how these costs have more than quadrupled between 1960
and 1995: “In 1960, when most mothers stayed home to watch the kids, child care accounted
for only two percent of a household’s income.
By 1995, that number had grown to 9 percent or almost $9,870 per year.”
There are other costs of raising a child that have skyrocketed since the 1960s.
The cost of childhood education such as elementary school tuition and fees has gone up considerably.
A CBS News article states that “education costs have sharply risen since 1960, when
USDA estimated that those expenses were around 2 percent of child-rearing expenses.”
Fatherly estimates that child care and education costs now account for “16 percent of the
budget, or around $38,040 over the course of a child’s life.”
In addition, American parents today are spending more on healthcare for their children than
their grandparents did.
Fatherly notes that “according to the USDA data, the price of out-of-pocket medical and
dental services not covered by insurance and prescription drugs has more than doubled to
around nine percent of a family’s budget, up from four percent in 1960, and accounts
for between $1,180 and $1,300 a year per kid.”
Going into debt has become a popular way to deal with these and other expenses.
News website Newstrail recently reported that “many families in the developed world are
scrambling with personal debt.”
This was not the case for past generations.
While people in the past borrowed money too, they had less credit options and less difficulty
paying back what they owed.
In a KERA radio interview, Louis Hyman, a business history professor at Cornell University,
discusses the history of credit in America, which is where the concept of the credit card
originated.
His discussion gives us an idea about the borrowing habits of previous generations.
“We all hear how our parents and grandparents never borrowed any money, but they borrowed
all the time,” Hyman says.
“They just borrowed in different ways.”
Hyman observes people mainly had store credit cards through the 1950s and 1980s, and they
generally had the money to pay their credit card bills monthly.
“Wages just kept going up and up and up,” he said.
“So that if you borrowed today, you could expect to make more in the future.”
As most of you have probably noticed, the rosy economic conditions experienced by previous
generations did not last.
The combination of easy credit for high-risk customers and hard economic times that resulted
in what Fortune Magazine refers to as “’precarious’ employment” have turned many people into
debt slaves.
And experts predict the number of debt slaves will increase in the future.
According to Newstrail, “economists are starting to use the term ‘debt slaves’
as they see another cycle of increased borrowing and a decrease in savings, all within a system
that encourages people to continue borrowing [ . . . ] in order to spend on consumer goods.”
The debt that is currently enslaving people comes from various sources.
Credit card purchases, mortgage loans, unpaid medical bills, and other borrowed money for
all people living in a household are lumped together in what is commonly known as household
debt.
A 2018 study by credit data management company Bloom found that household debt around the
world has been growing since the early 2000s.
One interesting finding of the study is that Chinese households have more debt than American
households: “Household debt, when measured relative to disposable income, as opposed
to GDP, has skyrocketed from 40 percent in 2007 to over 106 percent in 2017 according
to the Bank for International Settlements.
Compared to the US, which has a debt to disposable income ratio of 105 percent, Chinese households
are suffering from a higher level of indebtedness than American households on average.”
Unfortunately, household incomes in China have not increased enough to cover the higher
household debt: “While Chinese households have been on the receiving end of rapid income
growth for the past decade, incomes still haven’t kept pace with debts, as household
income has grown on average 12 percent a year while household debt has grown on average
23 percent a year.
As such, household debt growth has far outpaced household income growth.”
Another country that has more household debt than the US is Canada.
The study describes Canada’s “debt to disposable personal income ratio of 170 percent”
as the “highest in the Global North.”
While US households are struggling with a combination of auto loans, student loans,
and revolving credit as well as mortgage debt, the study found that “household debt in
Canada has been mostly driven by homeownership growth and a mortgage boom.”
The Bank of Canada has been somewhat successful in slowing down the increase in this type
of household debt through “interest rate hikes” designed “to dampen demand and
overconfidence in the housing market.”
The Organisation for Economic Co-operation and Development or OECD is another source
of data for household debt as a percentage of net household disposable income.
All of the top 5 countries with the highest household debt have debt that is over 200%
of net household disposable income.
The country with the fifth highest household debt is Switzerland, with household debt that
is 212% of net household disposable income.
In fourth place is Australia with household debt that is 216 percent of net household
disposable income.
Both Norway and the Netherlands are tied for second place with household debt that is 239
percent of net household disposable income.
Finally, the country with the highest household debt is Denmark, which has a household debt
that is 281 percent of net household disposable income.
While this amount of household debt may alarm some, Danmarks Nationalbank is not concerned
about it.
On its website, it explains that the main reason household debt is higher in Denmark
than in other countries is that Danish households “buy homes or consumer durables, such as
cars.”
These debts are a reflection that “compared with other countries, it is relatively easy
and inexpensive to borrow against wealth in Denmark,” and most of the people who are
borrowing money are wealthy.
Denmark’s National bank is also confident that Denmark’s large household debts will
be repaid because of the country’s “well-developed financial system” and the “large pension
wealth” available to Danes after they retire.
In addition, Denmark has a combination of an “extensive social safety net” and “a
high level of public service” that “reduce the risk that households are unable to service
their loans.”
While some of the debt we are burdened with today are for cost-of-living expenses that
are beyond our control, other debt reflects that many of us are contributing to our own
poverty through questionable consumer behavior.
We have a different attitude about shopping than earlier generations did, and it has caused
us to develop more wasteful spending habits than those of consumers of the past.
Through advertisements of the late 19th and early 20th century, we see consumers of this
time were more pragmatic.
Richard W. Pollay, a marketing professor at the University of British Columbia, describes
the main approach used in ads created between 1890 and 1925 as “veneration of products.”
In these ads, Pollay notes that the “sales strategy was direct and ‘rational’, describing
the products and their qualities, linking these to common sense advantages such as saving
ti[m]e, money or energy.”
In contrast, today’s consumers often shop for emotional reasons.
Many people buy things to make themselves feel better, a coping mechanism known as retail
therapy.
Business Wire recently reported the results of a 2016 US shopping survey.
It found “retail therapy is still a good pick-me-up, with 96% of adults and 95% of
teens admitting that they participate in retail therapy.”
In 2015, 15,000 people across 17 countries participated in a poll measuring “pick me
up” purchases called the MasterCard Treat Index.
According to one source, the poll found that people in Turkey frequently engaged in retail
therapy, “with two thirds of consumers claiming to make regular cheer-up transactions.”
Young people made more “pick me up” purchases than older people.
The poll found that “millennials are nearly twice as likely (60%) as Boomers (34%) to
treat themselves once a month or more frequently.”
And there are a large number of people who shop as a hobby.
The Drum, which is Europe’s largest marketing website, describes shopping as the “third
favourite pastime” in Singapore.
It cites the results of a study that found 84% of Singaporeans “’love’ to shop
online,” with 1.7 million of them “making one purchase a week.”
Online shopping as a hobby is also popular in China.
A 2017 survey conducted by financial services firm KPMG and Mei.com revealed that “online
shopping has effectively become a national pastime in China with 77 percent of respondents
identifying it as their favourite leisure activity.”
In addition, the news website Daily Beast notes that the “world’s most avid clothes
shoppers are the Chinese, with 31 percent saying that clothes shopping is their ‘favorite
thing to do.’”
These motives for shopping often result in buying more than we need, which leaves us
with a full house and an empty wallet.
Excessive spending on clothes is a good example.
In 1930, the average American woman “owned an average of 9 outfits” according to fast
fashion and sustainability expert Elizabeth Cline.
In the 21st century, that amount has increased dramatically.
A 2016 Daily Mail article reports that the “average American woman has 103 items of
clothing in her closet.”
The modern-day American woman may have more clothes than her 1930s counterpart, but surprisingly
she does not wear most of them.
A survey of 1,000 US women conducted by organizer company ClosetMaid found that these women
wore only about 10 percent of the items in their closets.
What happened to the other 90 percent?
The women considered “21 percent to be ‘unwearable,’ 33 percent too tight and 24 percent too loose.”
In addition, another 12 percent of their wardrobe consisted of “new, unworn clothing.”
How much are these wasteful wardrobes costing the average American woman?
A 2017 article by retail franchise company Winmark states that women “spend an average
of $3,400 a year” on clothing and accessories.
For some American women, this is nearly two month’s salary.
American women are not the only ones who overspend on clothes that often end up hanging uselessly
in their closets.
A 2017 Telegraph article reports that the average British woman “owns 95 items of
clothing and only wears 59% of them regularly.”
Like American women, British women spend a lot of money on “unwearable” clothes.
According to an article in the UK version of Marie Claire, new research finds that the
“average woman owns £2,400 [or about $2950 USD] worth of clothes she doesn’t wear.”
Another big spender on clothing that is largely unworn is the average Australian woman.
According to the Daily Mail, the “average Australian woman buys 27 kilograms (59.5 lbs)
of new clothes each year, throws away 23 kilos (51 lbs) every 12 months and only wears 33
percent of her wardrobe.”
We could not find exactly how much the average Australian woman spends on clothes, but in
2015 Australia topped fashion website WWD’s list of countries with the highest “per
capita expenditures on apparel.”
WWD states that Australians spent an “average of $1,050 annually.”
Some of the excess shopping that we previously discussed is the result of another bad spending
habit that will leave us poorer than past generations – impulse buying.
According to a 2018 CNBC article, a survey by Slickdeals.net found that the average US
consumer makes 3 unplanned purchases a week, which adds up to about $5,400 per year on
impulse buys.
British people are almost as impulsive as Americans when it comes to shopping.
A 2018 Independent article reported the findings of a study commissioned by online lender MYJAR.com.
The study revealed that British people “make an average of nine impulse buys” per month.
It also “found the typical adult blows almost £200.00 [about $258.73] a month on everything
from chocolate and sweets to new sofas, clothes and takeaways.”
These impulse buys add up to about $3,105 per year and “close to £144,000” or about
$186,287 over the lifetime of British consumers.
Impulse spending is a problem in other parts of the world too.
Nielsen’s 2013 Global Survey of Consumer Shopping Behavior “revealed that many online
respondents in Asia-Pacific and Middle-East/Africa are impulse buyers and adopters of new products.”
When presented with the statement “I often buy things I do not need impulsively,” 52%
of respondents in Thailand somewhat or strongly agreed with the statement, while the percentages
of those somewhat or strongly agreeing with the statement in India and China were 48%
and 44% respectively.
Egypt and Saudi Arabia had the same percentage of respondents -- 42%.
And now there is a new social trend that is causing young people to go deeper into debt
– social media consumerism.
Financial website The Ascent explains how social media increases spending:
“The biggest reason social media encourages you to spend money is an age-old concept taken
to its 21st-century extreme -- peer pressure, previously known as ‘keeping up with the
Joneses’ and now referred to as ‘FOMO (fear of missing out).’
With social media, you get a constant view of the best parts of other people’s lives.
You see the meals at fancy restaurants, the designer clothes, and the luxurious vacations.
And if you follow any celebrities or influencers, you’ll see those types of posts all the
time.
It’s natural to feel a bit jealous and to want the same for yourself.”
You may laugh at the reasoning behind social media consumerism, but the overspending that
results from it is becoming a serious problem.
The Ascent cites a study by Allianz Life that found “61% of millennials said they’ve
had feelings of inadequacy about their lives because of what they saw on social media,
and 57% said that social media caused them to spend money due to a fear of missing out.”
It also adds that “Credit Karma found that 39% of millennials had even gone into debt
just to keep up with their friends.”
In a recent article, CNBC also explores the financial toll social media is having on millennials.
It discusses the findings of Schwab’s 2019 Modern Wealth survey.
According to this survey, “just under half, 49%, of millennials (ages 23 to 38) say social
media influenced them to spend money on experiences.”
The survey also found that “48% say they’ve overspent when sharing experiences with friends,
whether it’s dining out or going on a group vacation.”
However, while millennials may be eager to share their experiences of the good life on
social media, they tend to hide the financial problems caused by them.
According to a Forbes article, “out of the 40% of people who went into debt for their
social lives, 73% kept it a secret from their friends.”
Is there any glimmer of hope that millennials can improve their financial circumstances?
A Business Insider article tries to see the bright side of the millennials’ situation,
noting experts call them both the “brokest” and “richest” generation.
Data from the Fed indicates that “individual incomes were falling for millennials” but
at the same time “family incomes for married couples grew.”
A study by the Pew Research Center also found that “millennial households are earning
more than previous generations did at their age nearly any time in the past 50 years.”
In addition, millennial researcher Jason Dorsey points out that in time inheritances may also
add to their wealth.
“From a big-picture viewpoint, millennials will likely receive the greatest wealth transfer
in modern history — from the baby boomers,” Dorsey said.
“However, the reality is that baby boomers are healthier and living longer than even
they planned, so that wealth transfer might not happen for 20-plus years.”
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