How Americans Spend Their Money

Last week in my 20 Rules of Personal Finance post I talked about the importance of getting the big purchases right:

8. Get the big purchases right. I know I shouldn’t be so judgmental but whenever I see $50-$70k SUVs on the road or enormous McMansions the first thing that pops into my head is, “I wonder how much they have saved for retirement?” Personal finance experts love to debate the minutia of brown bag lunches and lattes but the most important purchases in terms of keeping your finances in order will be the big ones — housing and transportation. Overextending yourself on these can be a killer.

This week I received an email that quantified this idea. Howmuch.net put together this really cool chart that shows the median inflation-adjusted spending levels over the last 75 years in twelve different categories (using data collected from the Bureau of Labor Statistics):

screen-shot-2016-12-21-at-8-28-40-am

 

You can see that housing and transportation dominate the average American’s budget today, with housing rising steadily over the years. With the usual caveats that every household is different and averages never tell the whole story, here are a few more observations:

  • In 1941, people spent more money on food than housing.
  • 1973 must have been a fun year for everyone as recreation and entertainment expenses skyrocketed.
  • Healthcare has risen over time but it’s not nearly as high as I would have expected.
  • Money spent on reading has slowly declined over time. I’m hopeful that’s because way more information is free these days, but that’s not a great trend in my mind.
  • Clothing expenses have fallen by more than half since the 1960s. My guess is globalization has had a huge impact on these numbers.
  • Spending on education looks to have seen the biggest percentage increase over time. People love to complain about student loans but these numbers are a sign of progress as more people are investing in themselves.
  • Tobacco spending has seen a steady decline since the 1960s but money spent on alcohol is one of the most stable categories. Maybe we should consider booze a consumer staple and not a consumer cyclical sector?
  • Cutting costs on minor spending items is not going to have a huge effect on your personal bottom line. The largest categories here are the ones that will make the biggest difference to your finances.

Source:
Unprecedented Spending Trends in America in One Chart (How Much)

 

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  • Amit Sinha

    Hi Ben,

    Excellent chart and commentary as always. Helps you step back and think. A couple of comments around your observations:

    1. HealthCare : does it include only the individual’s expenditures and hence rise looks lower than expected ? I am wondering how it would look if you included employer’s cost of medical insurance and also the government’s spending on Medicare and Medicaid.

    2. We definitely need to pay more attention of the larger items – a 10pct reduction on housing would have a greater impact than many of the categories put together

    • Jeff K.

      Of a few things that come to mind with respect to spending, first is a consideration to utility. Second might be a greater sense of responsibility “to the second generation.” It takes at least a generation to save, invest and allow time to build wealth. Too many “and’s” and we end up passing along the same pattern to our children. Mortgage AND tuition AND 529’s AND weddings AND retirement AND… Discussions with my children involve understanding what it means to have the ability to spend on “or’s” or “and’s.” I do not subsidize their “and’s” and remind them I will be responsible to their children (529’s etc.) and have enough in retirement so as not to be a burden on them. This will break the pattern of trying to support both generations. Apologies if that was a bit didactic.

    • Ben

      I think you can almost count the employer’s payment as part of salary these days but point well taken.

  • The sharp increase in housing costs interests me. I wonder if that is a function of increased workforce participation by women, with the extra household income being capitalized in higher real estate prices (particularly land)?

    Nick de Peyster
    http://undervaluedstocks.info/

  • Clark Herring

    These look like inflation adjusted dollars. I have to wonder how they would look at a % of inflation adjusted median income or some other personal income measure.

  • Loretta Hutchinson

    I have to respectfully disagree with your optimistic premise on this one….the increase in educational spending has been largely done with borrowed money paying for some things that are only peripheral to the education process. “Spending on education looks to have seen the biggest percentage increase over time. People love to complain about student loans but these numbers are a sign of progress as more people are investing in themselves.”

    • Ben
      • Loretta Hutchinson

        yes…certainly more employable. Unfortunately like those high priced cars, the loans may prevent them from getting traction financially and at times personally.

        Always enjoy your blogs and have introduced my two adult sons to it as well.

        • Gaston

          To what extent is this an example of the McMansion issue? People pay up for education at the “right university” or send their children to an expensive private school (like I’m doing, though it’s fortunately a more affordable one) but the return on investment isn’t always there. Buffett noted (when he was asked the same question) that community colleges are often a viable and cheaper option.

        • Ben

          That’s great. Thanks for sharing And I do agree that the student loan issue is out of control for many. My usual advice for those graduating is to live like a college kids for a couple more years while you get your finances in order.

  • UofODuck

    I admit that I’m jealous when one of my tennis buddies shows up in some new hot – and expensive – car, which they park next to my pedestrian Honda Accord. I can’t help but imagine how much better I’d look in a new Maserati or 7 series BMW than in my 10 year old car. Eventually, when out of the range of the new car smell, sanity returns and I remind my self that the future value of the difference between their car and mine over a suitable time period would likely pay for their car and more. The difference is that I have that money in the bank, while they have yet another cash burner in their driveway. Cars, horses, RV’s and vacation homes may stimulate the economy for some, but generally not for the people who own them.

    • Ben

      I have no problem w/people spending on nice cars…as long as they’re saving elsewhere. People get into trouble when they overspend here to undersave elsewhere.

      But I get what you’re saying

  • MG

    Very interesting graph. I wonder how much this varies by generation? For example I pay the entire premium for my and my spouse’s healthcare insurance, which at $24,000 per year easily doubles my next cost, which is housing, which since I have paid off the mortgage is comparatively low. On the other hand, my 28 year old son pays a huge proportion of his expenses for rental housing, but since his employer pays for healthcare coverage and he is healthy, he has almost no expenses in that area.

    Separately, the healthcare numbers surprised me (like you), so I did a little research. The graph shows that over the last 53 years (1961 – 2014) expenses went from about $2500 to $4100. I found government data that shows as overall health spending increased at a faster rate than personal income, household expenditures on health as a share of adjusted personal income grew from 4 percent in 1960 to 6 percent in 2013. This 50% increase is in the same range as your graph, so all the news reporting appears to be off-base regarding how massively healthcare cost have increased.

    The American dream of owning one’s home seems to be the real crisis in the USA.

    Reference: https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/HistoricalNHEPaper.pdf

    • Ben

      Yeah, I’m guessing there’s huge volatility around the averages here. On the house issue, this is why I think it makes more sense for most young people to rent for a while until they figure things out. No need to rush into something you’ll regret later.

  • TechnoPeasantx

    Wouldn’t taxes dwarf all categories?