Middle Class Has To Live Paycheck to Paycheck?

[The White Coat Investor]

Interesting article in The Atlantic:

Since 2013, the federal reserve board has conducted a survey to “monitor the financial and economic status of American consumers.” Most of the data in the latest survey, frankly, are less than earth-shattering: 49 percent of part-time workers would prefer to work more hours at their current wage; 29 percent of Americans expect to earn a higher income in the coming year; 43 percent of homeowners who have owned their home for at least a year believe its value has increased. But the answer to one question was astonishing. The Fed asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all. Four hundred dollars! Who knew?

Well, I knew. I knew because I am in that 47 percent.

I know what it is like to have to juggle creditors to make it through a week.

http://www.theatlantic.com/magazine/archive/2016/05/my-secret-shame/476415/

The discussion of whose fault it is is particularly good:

So who is at fault? Some economists say that although banks may have been pushing credit, people nonetheless chose to run up debt; to save too little; to leave no cushion for emergencies, much less retirement. “If you want to have financial security,” says Brad Klontz, “it is 100 percent on you.” One thing economists adduce to lessen this responsibility is that credit represents a sea change from the old economic system, when financial decisions were much more constrained, limiting the sort of trouble that people could get themselves into—a sea change for which most people were ill-prepared.

It is ironic that as financial products have become increasingly sophisticated, theoretically giving individuals more options to smooth out the bumps in their lives, something like the opposite seems to have happened, at least for many. Indeed, Annamaria Lusardi and her colleagues found that, in general, the more sophisticated a country’s credit and financial markets, the worse the problem of financial insecurity for its citizens. Why? Lusardi argues that as the financial world has grown more complex, our knowledge of finances has not kept pace. Basically, a good many Americans are “financially illiterate,” and this illiteracy correlates highly with financial distress. A 2011 study she and a colleague conducted measuring knowledge of fundamental financial principles (compound interest, risk diversification, and the effects of inflation) found that 65 percent of Americans ages 25 to 65 were financial illiterates.

I was glad to see the author put at least some of the blame on the lack of financial literacy of the people themselves.

At any rate, I bet a lot of us, middle class or not, can relate to a lot of the article. If nothing else, learn from the author's numerous mistakes.

[retinadoc]

Thanks for the link -- that was a bravely written article. Hopefully his future-MD daughter spends some time on WCI.

[amphora]

I really liked this article when I saw it online and was disappointed that the Bogleheads moderators decided this was off topic.

The issue of middle class wage stagnation is very real and has been getting press. But I liked that he addressed the issue of professionals (who one would assume are fine financially) dealing with living paycheck to paycheck. I wish he gave a more exact income figure (though obviously that's personal) as it would have given a better understanding of the financial postmortem.

What I was trying to figure out throughout the piece was the extent of the financial problems were caused by bad financial decisions, bad luck, conscious career choice and other baggage of being a writer, the high cost of living in NYC, etc . In my mind the bad financial decisions were spending a lot on the credit cards. Bad luck was managing to lose money in Brooklyn real estate and losing a job. I don't criticize his decision to become a writer and live in the New York area but I think it was unrealistic to be able to afford the City and private schools on a writer's irregular income. If they had just moved to Westchester at the beginning they'd have more savings and wouldn't have had to pay for private school.

 

TLDR: It's possible to save no money or be in debt despite having an upper middle class income, especially if you live in NYC.

 

[Hatton]

The article is really good.  I googled the author and his resume is really impressive.  I realized that I used to watch a Fox News program where he was a commentator.  It really shows that income can be fleeting and expenses must be tracked.

[Docbeans]

Eye opening article... "the American dream, defined by factors that generally corresponded to the Commerce Department’s middle-class benchmarks, would require an income of just more than $130,000 a year for an average family of four. And the median wage is half of that".

[jfoxcpacfp]

I was so sad for him as I read this article, even knowing the choices were theirs. His book on Walt Disney was very good, listened to it last year. I especially agree with this paragraph:

"It is ironic that as financial products have become increasingly sophisticated, theoretically giving individuals more options to smooth out the bumps in their lives, something like the opposite seems to have happened, at least for many. Indeed, Annamaria Lusardi and her colleagues found that, in general, the more sophisticated a country’s credit and financial markets, the worse the problem of financial insecurity for its citizens. Why? Lusardi argues that as the financial world has grown more complex, our knowledge of finances has not kept pace. Basically, a good many Americans are “financially illiterate,” and this illiteracy correlates highly with financial distress. A 2011 study she and a colleague conducted measuring knowledge of fundamental financial principles (compound interest, risk diversification, and the effects of inflation) found that 65 percent of Americans ages 25 to 65 were financial illiterates."

Finance is so complicated for most people and they rarely know where to turn. Credit cards are definitely at fault, but I also think the financial advice industry shoulders part of the blame. Lacking clarity about the future cost of present decisions (a financial plan), you'll be hard-pressed to make the best decisions about your money.

[AlexxT]

I've read some of those surveys.    It's pretty depressing stuff, and I count my blessings every day.  Those surveys also explain the anger and anxiety of the electorate this election season.

[jz]

Great comprehensive survey of the financial status of our people.   He didn't include, however, the new composition of "household".   51% of American adults are not married.  They live financially and emotionally desperate lives.   Women no longer need men because they are supported by BigGov.    Men are valued by women only by the marginal utility of their incomes.  When the bickering starts , men are dispensable.

On a medical business note,  47% of Americans can not come up with $400 for an emergency.  That would seem to explain the nonpayment of the huge Obamacare deductibles-----> demise of private practices.

 

[YYjames]

1. Great article. This is the reality for majority of America. "Next door" millionaires are few and far between.

2. Donal trump or any of these "candidates" going to fix all of this? ok.

3. Articles like these are the reason I do not trust any financial pundit or the market. WCI stamped or not. DIY; survivor style.

[Josh0731]

Not surprising given that it goes along with other studies/articles about how poorly people save, how in debt people are, how terms for things like car loans are getting longer and longer.  My 2 cents: 1) Credit got way too easy to obtain, allowing people in general to get comfortable with easy credit, being in debt, and the lifestyle allowed by living beyond ones means.  And the economy got way too accustomed to the extra dollars consumer credit injected in the system.  Remember G.W. Bush telling people after 9/11 to go shopping?  A cabby in Las Vegas one time told me how much he hated Obama because the president said after the '08 crash that people shouldn't waste money in Vegas during economic crisis - and he was right!  2)  It's easy for some of us to forget just how little money many Americans make. Minimum wage is practically slave labor.  Wages have declined despite inflation and economic growth elsewhere in the economy, which only means that growth in consumer/retail sectors is derived from thin air.  The average salary in America is $52,000 - it really sucks to be below average.

[Rando]

amphora wrote:

I really liked this article when I saw it online and was disappointed that the Bogleheads moderators decided this was off topic.

The issue of middle class wage stagnation is very real and has been getting press. But I liked that he addressed the issue of professionals (who one would assume are fine financially) dealing with living paycheck to paycheck. I wish he gave a more exact income figure (though obviously that’s personal) as it would have given a better understanding of the financial postmortem.

What I was trying to figure out throughout the piece was the extent of the financial problems were caused by bad financial decisions, bad luck, conscious career choice and other baggage of being a writer, the high cost of living in NYC, etc . In my mind the bad financial decisions were spending a lot on the credit cards. Bad luck was managing to lose money in Brooklyn real estate and losing a job. I don’t criticize his decision to become a writer and live in the New York area but I think it was unrealistic to be able to afford the City and private schools on a writer’s irregular income. If they had just moved to Westchester at the beginning they’d have more savings and wouldn’t have had to pay for private school.

 

TLDR: It’s possible to save no money or be in debt desp

 

ite having an upper middle class income, especially if you live in NYC.

Click to expand...

My thoughts were the same, that a lot of his wounds were self-inflicted.  I guess if you are on TV you have to live relatively near the studio, but a writer can write anywhere and he chose to live in a HCOL area.   It's tough for me to have much sympathy for people living in a HCOL area and complaining about the cost of living.

The author's situation doesn't really reflect what the actual middle class (folks making 50-60K) have to deal with.

[Osiris]

Excellent article and a must read for our children, friends and family if I could do in a way, which was taken as non judgemental.

The article is all about financial literacy and that makes it even more painful that the thread  was shut down on the Bogleheads, which purports to be education regarding financial literacy.

I did not take the author to be middle class and if I had to guess, how much money he spent on  his children's education, the coop he paid the second mortgage for etc, I  would guess it was a million dollars.

The  article was well written. He was not financially literate and I would have loved to see the actual dollars and cents as to what their income and expenses were, however that would have me feel like a rubbernecker at a car crash site.