David R. Henderson  

Incomes, Spending, and Saving

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Earlier this month, I read two articles that were somewhat eye-opening to me about various Americans' views and actions on income, spending, and saving.

One, which got a lot of play, was Neil Gabler's piece in The Atlantic, "The Secret Shame of Middle-Class Americans," about how badly he has done financially despite a relatively healthy income: he never gives the income number and so it's hard to say. The other is a set of interviews by David Walters in Esquire. Walters, in "4 Men with 4 Very Different Incomes Open Up About the Lives They Can Afford," interviews 4 people whose annual incomes, respectively, are $1 million, $250K, $53K, and about $20K. He asks about their incomes, spending, etc.

One surprising thing in the Gabler piece was this:

the study by Lusardi, Tufano, and Schneider found that nearly one-quarter of households making $100,000 to $150,000 a year claim not to be able to raise $2,000 in a month.

Who knows if it's true? But even the reasonable probability that it might be true was surprising.

By the way, if not for the credit line on my house, there would be some months in the year--probably at least 6--in which I could not raise $2,000 quickly. I would have to not pay off one or two credit cards. So you could argue that I'm one of those people who lives paycheck to paycheck.

Although that's literally true, it misses the fact that my wife and I save about $30K or so a year and have done so in most years since about 1995, except when my daughter was in college. (Those years, we saved "only" about $15K.) We do it, though, in 403(b)s, SEP-IRAs, and Roth IRAs. In other words, it's all tax-sheltered. That's why we live paycheck to paycheck.

But that's not Neal Gabler's problem. He really did make bad decision after bad decision. Refreshingly, he's not asking for sympathy or blaming anyone else. I did get the impression, though, that he still doesn't realize just how bad some of his decisions were.

Try this from Gabler:

And then, on top of it all, came the biggest shock, though one not unanticipated: college. Because I made too much money for the girls to get more than meager scholarships, but too little money to afford to pay for their educations in full, and because--another choice--we believed they had earned the right to attend good universities, universities of their choice, we found ourselves in a financial vortex. (I am not saying that universities are extortionists, but ... universities are extortionists. One daughter's college told me that because I could pay my mortgage, I could afford her tuition.) In the end, my parents wound up covering most of the cost of the girls' educations. We couldn't have done it any other way. Although I don't have any regrets about that choice--one daughter went to Stanford, was a Rhodes Scholar, and is now at Harvard Medical School; the other went to Emory, joined WorldTeach and then AmeriCorps, got a master's degree from the University of Texas, and became a licensed clinical social worker specializing in traumatized children--paying that tariff meant there would be no inheritance when my parents passed on. It meant that we had depleted not only our own small savings, but my parents' as well.

The most telling part of that paragraph? The term "earned the right." Really? Just because your daughters were your daughters and, presumably, had done well in high school, they earned the right to go to Stanford and Emory?

Megan McArdle, in an excellent piece on Gabler's piece, responds:

Untold generations of human beings have lived to adulthood without the blessings of a brand-new minivan, a travel soccer trophy or a Harvard education. Modern children raised without them will probably also be fine.

Here's another stunning Gabler decision:
We have no retirement savings, because we emptied a small 401(k) to pay for our younger daughter's wedding.

Wow!

Now to the Walters interviews. First, I think Walters should have probed a little more. Maybe he did but didn't report it.

But consider this question he asked: "Looking at your current ca­reer prospects, how much money do you think you'll be earning in ten years' time?"

Not one of the 4 men interviewed answered it. The guy making $1 million a year stated a net worth goal but didn't answer what he thought his income would be. The guy making $250K a year stated an income goal but didn't say that he thought that's what his income would be. The guy making $20K also stated an income goal, an ambitious one that made me wonder.

At least they stated a goal.

The guy making $53K a year stated a wish.

The overall impression I get from the Gabler piece and parts of the Walters interviews is that many people just aren't willing to think clearly about their financial lives. I'm blessed because I had so little growing up that I learned to appreciate ads on TV for various things for the dreams I could have about them: it didn't even occur to me to buy them. I couldn't. That carried over to my adulthood. I love going to car dealers and looking at the cars. I buy a car once a decade. My motto has been to live below my means and invest in index funds. It has worked.


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CATEGORIES: Finance




COMMENTS (21 to date)
David writes:

You are following a good plan. Live below your means, invest in index funds or etfs and shelter as much of your investment as you can in IRAs, 401(k)s etc.
Also, take chances in your career. As our AZ Card's coach says, "Don't risk it, no biscuit." Look for equity, not just salary.
Good luck

foosion writes:

People really should do better, but a system that has so many people doing so badly in terms of savings, etc. may not be an optimal system for our population.

John Hall writes:

The fact that so many people have problems with finances makes me understand why they have the restrictions on removing funds from 401k's etc. However, I generally don't have any issue with saving money. If only those restrictions didn't apply to me!

quadrupole writes:

What is left out here is that a household making $100-150k a years is almost certainly paying more than $2k a month in federal taxes (income tax, FICA, Medicare, etc).

George writes:

My impression is that Gabler is sacrificing his own present well being for the future well being of his children. He's doing what many first generation immigrant families do for their children. In this context he should be rightfully suffering and requires no pity or sympathy for his own choices.

It's odd though he says that through the aid of his parents his family was able to afford college tuition for his daughters. That's great but what else is great are student loans. It's difficult to comprehend the enormity of student loans being straight out of high school and having little to no work experience/managing your own personal finances but at the price of interest a poor student can defer payment for years and if you take only subsidized loans then you can limit the amount of money you pay back in interest. This is great because it spreads the crippling financial burden over many years usually 10. Gabler could have gone down the student loan path it's unclear if he did but taking his poor financial state at his word it appears he did not want to burden his children with student loans.

On another note student loans will incentivize the soon to be professional to choose a career that is marketable/will allow them to pay back their education. What parent wants to say to their kid "No we can't afford your dream job."? Nobody clearly, but poor people by definition do not have a choice or at best they must compromise and like you say "you need to play the hand you're dealt." Sometimes that means sacrificing so your children can afford to make the choices you could not.

Ted writes:

If you have assets in a Roth IRA, you can raise cash easily. Just sell something.

Dan Hill writes:

Gabler lost me at "we believed they had earned the right to attend good universities, universities of their choice."

I don't think "earn" means what he thinks it means.

One daughter is at medical school, one of the few jobs where it makes sense to borrow money for your education, but he cleaned out his parents anyway. And the other is a social worker for Pete's sake. It sounds like he's raised a pair of entitled princesses.

I have this argument about the cost of college with friends all the time. Unless they tell me their kid is going in state, and living at home if State U is within commuting distance, my response is "talk to the hand." Unless of course the kid is a future Nobel prize winner who really would be wasted anywhere but MIT or Harvard, in which case problem solved, he'll get a scholarship.

tiffany267 writes:

The commenter suggesting student loans perhaps is unaware that federal student loans are definitely more of a challenge to be approved for if the family has significant income. There are, of course, private student loans, but that's hardly the same option.

Jesse C writes:

Foosion says

People really should do better, but a system that has so many people doing so badly in terms of savings, etc. may not be an optimal system for our population.

First, I'd argue that the problem is with the culture, not the "system" (whatever that means). On the other hand, there are a lot of government programs, laws, etc, that subsidize bad decisions and disincentivize saving. If that's what you mean by "a system" then I agree.

Second, badly as compared to what? I would guess the earner of a median income in 1800 saved a larger percentage than his modern counterpart. But if you're just comparing against what you suppose the situation could be, that utopia of your imagination is what got our culture here in the first place.

The Original CC writes:

Dan Hill:

Unless of course the kid is a future Nobel prize winner who really would be wasted anywhere but MIT or Harvard, in which case problem solved, he'll get a scholarship.

AFAIK, neither Ivy League colleges nor MIT give academic scholarships.

ThaomasH writes:
The overall impression I get from the Gabler piece and parts of the Walters interviews is that many people just aren't willing to think clearly about their financial lives.

I agree, and that's why I think public policy should promote (nudge/require/whatever) more personal savings. SS and tax sheltered savings plans are good as far as they go, but do not go far enough. I think a shift from an income tax to a progressive consumption tax would help, but I'm not sure that alone would be enough, either.

J Mann writes:

Dan Hill:

I have this argument about the cost of college with friends all the time. Unless they tell me their kid is going in state, and living at home if State U is within commuting distance, my response is "talk to the hand." Unless of course the kid is a future Nobel prize winner who really would be wasted anywhere but MIT or Harvard, in which case problem solved, he'll get a scholarship.
I'm a State U kid myself, but AFAICT, the value of the prestige schools is primarily networking and pedigree. Your kid is likely to marry another prestige school applicant; she can get jobs from them, etc. Given that, it's not surprising that the pedigree schools charge for what they're selling, but there's no way to avoid the inequality effects - pedigree school spots are valuable in large part *because* they're exclusive and rare. OTOH, I can't explain why people pay pedigree prices to go to a private or out of state school that has great fit, but minimal pedigree, but they do.
Swami writes:

J Mann,

I agree. There are inexpensive options for college available to many people. Not just local state college, but state college after two years in community college. In many fields (certainly not all) 99% of one's career is determined by what you do after you are hired.

I hired more people than I can ever remember, and many of them are now high level executives, and the name of the college they went to was less important than the shine of their shoes (and the shine of their shoes was something I rarely even noticed). I would not say any factor was totally unimportant, including the name of their school, but to imagine that someone spent their life saving for this factor is a sign that people totally misunderstand the path to success, or at least the possible path to success.

paul writes:

My kids did what I consider the optimal strategy. They went to community college for 2-3 years (almost free in California to residents). Then they went to "name brand" schools and came away with degrees from Cal Poly and UC Santa Cruz. Nobody is going to notice that they spent more time at De Anza College than at the school that issued their final degree.

I fully recommend the approach if your state works like California (in this respect, I commiserate if your state works like California in many other ways!)

paul writes:

Oh, and one other thing. If you work in the startup environment like the millionaire in the Vanity Fair article (I think his name was Nguyen) then you don't think in terms of income, you do think in terms of net worth.

When I worked for a startup, I had a salary of about $160K (I was VP engineering) and about 1.5% of the company. When we were acquired that 1.5% was suddenly $2M. But if you had asked me what I expected my income to be that year, I would never have said $2M. In that environment you are actually trading off a lower income for a large (hopefully) capital gain.

LD Bottorff writes:

Even when I was young and idealistic, I realized that much of what is taught in college is worthless. Now, I think it's much worse, but the Gabler article drives home something that is even more damaging about modern college education; students are being trained to accept debt as normal. As has been pointed out, there are a few jobs for which college debt makes sense, but very few.

In a way, his article is inspiring. It has the potential to have a much greater impact than his books or other articles. I'm glad he wrote it. I hope millions read it and consider the lessons.

Floccina writes:

I had a friend who was a tax accountant and he told me the following: "I will have a couple making $200k/year come in and tell me that they cannot make ends meet but another couple will come in making $15k/year and say they are doing fine." This was in about 1990.

Floccina writes:

BTW As motivation I promised my son that if he got into MIT, I would pay for it. He did not get in. He is an engineer though he went to UCF for very low tuition.

My wife and I made just a little over minimum wage well into adulthood. I adjusted my living to that, and now I make a lot but only spend about a 1/4 or 1/5 of my income. My other son is a plumber's helper and makes about $12/hour and he lived with us for 2 years after high school and saved money and bought a nice condominium for cash.

It is all choices.

Floccina writes:

Sorry for making 3 comment but if Gabler was not easily able to afford tuition at Stanford, Stanford would give him financial aid. He just needs to reduce his spending. If he had to live on $15/year, he could do it and still be middle class.

David R. Henderson writes:

@Fioccina,
You mean $15K/year, not $15/year, right?

Floccina writes:

Yes David, sorry. A person would right to say that they cannot possibly live on $15/year!

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