Where's all the money coming from?
February 22, 2005 11:06 AM   Subscribe

Ok, so it says that the typical person earns $14/hour, and the typical household earns less than $40k/year. Yet everywhere I look, I see displays of wealth. Expensive homes, cars, boats, TVs, activities, etc. So my question is: how are people paying for all of these expensive things?

I earn pretty good money (double the avg), but I would never dream of buying a $300k condo, a $40k SUV, and a $100/month cell-phone plan. On top of that, it seems as if every teenager is driving an Escalade, has a cell-phone, and is always shopping. Every time I go to a nice restaurant, it's packed. I go on vacation and there's millions of fellow Americans already there.

Can credit alone explain this? I just don't get it..
posted by eas98 to Work & Money (44 answers total)
Credit is a big cause, especially with the low interest rates. Also, mortgage interest and large SUVs are tax-deductible. People tend to spend wildly with tax refunds instead of realizing that they overpaid their taxes in the first place.

Don't forget that there are at least 300 million of us in this country, and a lot of people make far less than $40k/year.
posted by bh at 11:11 AM on February 22, 2005

I think it depends on where you're looking. In a lot of places it would be easy to ask the exact opposite question ("The typical househould around $40k a year, but all I see is poverty. Where's all the money?"
posted by cosmonaught at 11:17 AM on February 22, 2005

You can get an Escalade lease for $625 a month with a minimal down payment. That doesn't require you to be rich, it just requires that you spend money strategically.

Something else to consider is relative cost of living. The numbers you are quoting may be national averages, which have nothing to do with your local average. You can live a lot better on $40k in the South than you can in the Northeast.
posted by smackfu at 11:17 AM on February 22, 2005

Do you put away money for retirement? If you put away what you should, you may have considerably less money to spend on housing, food, and clothes. If you don't save for the future, but borrow on it instead, then you have more money now.

And the teenagers or those in early twenties are most likely subsidized by their parents' money. I know a 19 year old who drives a better car than I do. She pays the car payment, but the vehicle is in her parents' name and they pay her insurance. She has quite a bit of money to play with, but she can't afford to move out.

Plus, in some cities, a 300k condo is the most affordable thing, so it almost seems cheap to some people.

The three of us in my household all make half of the national average. If we made $14/hour, maybe we could afford health care (maybe another expense others are skimping on to buy the McMansion?).
posted by Monday at 11:19 AM on February 22, 2005

I often wonder the same thing. My guess is that what you see are "snapshots." That is, I'm assuming that the wealth you see everywhere is just in passing--someone driving a Mercedes SUV as you wait to cross the street, the data entry person at work taking a European vacation, your neighbor unloading a new big-screen HDTV. What you (and I) don't see are the other aspects of these people's lives. Maybe the data entry clerk has been saving for years for that vacation. Maybe the SUV driver lives in a crummy little rental and chooses to spend his money on car payments. That and credit, as bh said.
posted by scratch at 11:23 AM on February 22, 2005

As a probably exterme example but one that many are struggling to live within; Take Los Angeles;
From L.A. Observed


That amount is the gap between the actual median income in Southern California and the income you would need to qualify for a mortgage to buy a house that sells at the median price of $460,210.

$51,780 median income
$106,830 income needed for loan
posted by stuartmm at 11:27 AM on February 22, 2005

Possible reasons:

1) Your location. If you live in or near a wealthy suburb or urban area, you will see a lot of conspicuous displays of wealth such as cars and homes. But you likely won't see the incredible poverty that exists in inner-city areas; nor the near-poverty that is fairly standard in much of rural America. Wealth and poverty tend to be strongly concentrated, so that some areas will seem full of expensive homes and SUVs while others won't (I see, for example, that you are in Miami - an ares with incredible examples of concentrated wealth - and poverty). And most of us tend to spend more time in expensive areas than poor ones.

2) Credit. A lot of the most expensive items are purchased on credit, leased, or are under some sort of rent-to-own policy. So much of what you see out there was not paid for in cash in one fell swoop, but rather is paid for little-by-little over time. That kid doesn't own the SUV - his (parents') bank owns it, and he is paying for it over time. The truly scandalous thing is the amount of interest that is being paid to finance all of these baubles.

3) Selectivity. We tend to notice displays of weath and ignore evidence of poverty. If you see ten Hondas and one Escalade drive by, you will "notice" the Escalade but not the Hondas. You will remember the gigantic flat-screen TV you saw through a neighbor's window, but not the dozens of little ones you also saw on your evening walk. You will remember the people with the fancy clothes and forget those wearing jeans and a T-shirt. Thats why its called conspicuous consumption.
posted by googly at 11:29 AM on February 22, 2005

What Monday said. Remember that many people make decisions about money that are emotional (one could say irrational). IMHO many people who drive expensive cars make sacrifices in other areas of their lives (not planning for retirement, not having an "emergency" fund, buying on credit) in order to have an "image" (look at me and how much money I have).
posted by mlis at 11:30 AM on February 22, 2005

Seems like a lot of people are declaring personal bankruptcy these days. (Okay, so the article is a few years old, but I'd wager the trend continues.) Health care costs or the loss of a job are the common causes. Maybe lots of people are spending on luxuries instead of insurance and savings?

On preview, what MLIS and Monday said.
posted by hydrophonic at 11:32 AM on February 22, 2005

It's credit card debt, to a large extent. The average American carries $8,562 in credit card debt, double what it was 10 years ago. People buy things they can't afford, because they can buy it with credit.

My belief is that advertising has changed the assumptions of consumers. Now people assume they should have an Escalade, or a BMW, because they've been told they deserve it.
posted by Hildago at 11:35 AM on February 22, 2005

A hefty number of households have no money left at the end of the month, in the "I'd better put off paying the electric bill until my paycheck gets deposited" sense.

You don't have to buy that Escalade for $1K a month when you can lease it for $635 a month as smackfu said. Also, most of my friends with nicer cars than me don't own a home. With rent around here going for about half of the mortgage on a decent house(600-800 rent vs. 1300-1400 mortgage), that's a sizeable car payment.

Thirdly, and most significantly when I was in SoCal anyway, I knew quite a few people whose homes had appreciated 50-75K in the last few years. If you take a home equity loan on that, that's a lot of play money.

On preview: What scratch said, you only notice the nice cars, you probably don't notice the '79 lime green Pinto.
posted by madajb at 11:35 AM on February 22, 2005

I'm also mystified and above doesn't explain it to my satisfaction. How the hell do all these people live?
posted by 31d1 at 11:36 AM on February 22, 2005

There are two main issues in play here.

First, while 40k may be average for the nation, it probably isn't average for where you live. Different cities, different neighborhoods have different concentrations of wealth. There are a lot of places in the US where you wouldn't see anything like this.

My town has a pretty good mix, and I see plenty of Lexus SUVs and plenty of old 80s beaters (and a few H2s, bleh).

The other factor is salience. You're a lot more likely to notice a teenager in an Escalade then you are a teenager in a Taurus, for example. So Escalade drivers appear to be more common then they really are.
posted by delmoi at 11:37 AM on February 22, 2005

People like to live beyond their means to project a certain image. I don't think there's an explanation beyond that. The richer people in your area probably drive a second hand Honda and watch a 19" CRT.
posted by sid at 11:43 AM on February 22, 2005

$625 a month for an escalade isn't even really all that much. If I had good credit (ahem) I could easily afford it. I just wouldn't want too...
posted by delmoi at 11:43 AM on February 22, 2005

31d1- Paycheck to paycheck.
At least, my friends with average-for-my-area incomes and lots of toys do.
posted by madajb at 11:47 AM on February 22, 2005

There is a significant segment that has all those outwardly visible trappings of wealth, but are over their heads in debt. The people in the big houses with fancy cars are having their utilities cut off, losing their houses, having no savings, and having to skimp on neccesities at nearly the same rate as people making a fraction of the income. Many live (as madajb said) paycheque to paycheque even though they look like they're set.
posted by raedyn at 11:52 AM on February 22, 2005

Actually, I live in Miami, which is supposedly one of the poorer cities..

I can't believe it's just credit, though.. I mean, sure, credit debt has doubled, but that's only a $4k increase over 10 years.. That doesn't cover these expenses.

I try not to be selective.. But everywhere I look -- BMWs, Mercedes, Hummers, $600k homes, boats, etc.

The thing is, at the same time, all we hear is about how bad things are economywise.. I don't see that either.
posted by eas98 at 11:57 AM on February 22, 2005

A little stereotypical perhaps, but drug money isn't included in labor statistics.
posted by smackfu at 12:04 PM on February 22, 2005

Personal observation is a pretty poor way to assess the average wealth of a nation of 280 million people. As counterintuitive as it may seem, you can ignore your lying eyes and rely instead on government statistics.
posted by stupidsexyFlanders at 12:11 PM on February 22, 2005

rely instead on government statistics

No thanks.. I already am aware of how the goverment 'fixes' their stats to suit themselves. They do it with unemployment for sure, and I don't doubt that they'd do it wherever else it suited their needs.
posted by eas98 at 12:15 PM on February 22, 2005

eas98 - I doubt that you can provide a credible source that the Bureau of Labor Statistics "fixes" unemployment statistics "for sure". You may not agree with the technical approach (for example, those not actively seeking employment are not counted as unemployed), but that doesn't justify saying that career civil servants ("government bureaucrats", to some people) are actively distorting what is reported.

So - what are your sources for believing that government statistics aren't useful for understanding unemployment, poverty, distribution of wealth, etc - even if they are not perfect - and are in fact deliberately distorted?
posted by WestCoaster at 12:32 PM on February 22, 2005

$625 a month for an escalade isn't even really all that much

My last car payment was a third of that, and I owned the car at the end of it. Over a typical lease term, $625 a month is an obscene amount of money to pay for a vehicle even if it were a loan, and the fact that you never own the vehicle is just insult added to injury.
posted by kindall at 12:40 PM on February 22, 2005

The secret shame of new housing developments full of young DISK families: the families are so broke after they pay the mortgage, for two cars, the toys that they feel that they deserve because they're working their butts off and for daycare for the kids that the big beautiful McMiniManses they've chosen are full of unfurnished rooms. They furnish the rooms that they must: bedrooms, home office, family room. Formal living rooms and dining rooms sit empty, or become playrooms for the kids, full of toys. Basements are full of retained bent aluminum-framed futons and worse from their college days.

The couple who live next door to my sister eat all of their meals in the family room, in front of the television, because they don't even have a kitchen table. They don't ever have guests because there's no place for them to sit; the family room has a love seat and a home theatre and nothing else. My sister is looking to get out of the neighborhood to find a community where the residents are a tad more established -- and realistic about what they can afford on their income.
posted by Dreama at 1:15 PM on February 22, 2005

Those people don't have two nickels to rub together. They put down 5% or less of the purchase price of their condo or home. They got a thirty year loan. They pay PMI, and a relatively small monthly mortgage payment. They will pay way more in interest over the life of the loan than I will with a 15 year loan paid off in 12.5 years. They want a new car every three years so they lease and just always have a car payment. They have no savings, no rainy day fund, no retirement plan. I hope they like the taste of dog food, 'cause they are gonna have to get used to it.
posted by fixedgear at 1:15 PM on February 22, 2005

Um, we put down 5% on our house, and we pay PMI. Still, paying the mortgage around here is better than rent -- why would we pay $800/month to rent a nice apartment when our house costs us only about $300.00 more, and is building equity and credit? I am one of "those people" in that sense, and I don't feel badly about it.

Difference is, we are not shelter-poor -- that is, we don't starve because of the mortgage. We are able to pay our bills and still have a little fun and save a little. Apparently, we are in the minority. I knew buying the house would make us have to make different decisions about gadgets and vacations, and I was fine with that. Other people, for whatever reason, don't make that distinction.

As others have pointed out, people have a hard time denying themselves anything. Credit is out there and for the taking, and people spend, spend, spend until they are maxed out across the board. THEN they have a house, two new cars, some crazy expensive electronics, new furniture, and it's all "On the credick" as we say. That's when people are in trouble. They look terribly good on the road, but on paper, they are a shambles of late payments and peanut butter cracker dinners.
posted by Medieval Maven at 1:59 PM on February 22, 2005

try not to be selective.. But everywhere I look -- BMWs, Mercedes, Hummers, $600k homes, boats, etc.

But compared to what? Do you ever spend a day counting all of the Accords or Escorts you see, or even just counting all of the cars you see?

You won't know how rare a Mercedes or Hummer or $600K home is unless you start counting all of the cars that aren't fancy, and all of the homes that are cheap, too.

It's easy to notice lots of rare events when there are lots of possibilities to see them. I don't know how many 97--00 Preludes there are on the road, but it can't be more than 1 or 2% of the vehicles. But, whaddaya know, after I pick one up I start seeing them *everywhere*, even though they're no more common than when I had the shitty old Probe.
posted by ROU_Xenophobe at 2:09 PM on February 22, 2005

Um, we put down 5% on our house, and we pay PMI

Medieval Maiden: I think $1,100 for a mortgage payment is just fine. Apologies for that somewhat ill-considered remark. What I had in mind is someone in a $500K house that they got by the skin of their teeth. Shelter poor is the right term.

There are also quite a few folks who live in what could only be charitably described as hovels but drive shiny new cars. You can't drive your house down the road, right?
posted by fixedgear at 2:20 PM on February 22, 2005

eas98 -

You're noticing a small slice of society, as others have suggested. Americans today spend no more on luxuries than they did 20 years ago. They drive older cars and live in older houses. Whether today's economy is bad or not depends on who you ask - real hourly wages fell last year for the first time since 1993, but corporate profits rose spectacularly .
posted by bonecrusher at 2:21 PM on February 22, 2005

How do they pay for this?

They don't

The average person dies with $65,000 debt
posted by bamassippi at 3:02 PM on February 22, 2005

"Today, the basic expenses consume 75
percent of the family’s combined income. Their nut—the amount that they must pay in
good times and in bad—is fixed at 75 percent of their income."
(From Bonecrusher's link).

If that's true, then ouch.
posted by madajb at 3:41 PM on February 22, 2005

They want a new car every three years so they lease and just always have a car payment.

Hmmm.... and I'm really wrestling with the prospect of replacing my 95 Ford Aspire with a Scion xA.... I mean, the Aspire still runs!
posted by Doohickie at 4:34 PM on February 22, 2005

bamassippi: Based on my run ins with US healthcare, I have a gut feeling that much of that debt arises from medical expenses.
posted by blender at 4:54 PM on February 22, 2005

Half of all U.S. bankruptcies are caused by medical expenses.
posted by Zed_Lopez at 5:10 PM on February 22, 2005

In the more prosperous metro areas in the country, middle class houses have been appreciating at $20k, $30k, or even $50k a year for the past five or six years.

This can make a person with a middle class income feel rich. This "wealth effect" is well known, and it can lead people either to take down home equity lines, accumulate other debt, or stop other forms of saving, all to fund consumption.
posted by MattD at 5:26 PM on February 22, 2005

Americans today spend no more on luxuries than they did 20 years ago.

Interesting paper...I have a slight gripe with the way she defines the "nut", the fixed costs versus the discretionary costs. She says the fixed costs are mortgage, child care, health insurance, car, taxes, but doesn't include food or clothing. Basically she just chose to categorize the groups that have gone up in spending as fixed costs, and called all the groups that have gone down in spending as discretionary.

I think I still agree with her basic premise, but that is somewhat misleading. There is a certain part of the food and clothing budget that you just can't cut back on from month to month.
posted by jacobsee at 5:45 PM on February 22, 2005

The majority of people I know (mid 30s to mid 40s) are doing absolutely nothing for retirement. They are living beyond their means and contributing little or nothing to retirement.

Even those folks that I thought were fairly financially responsible (paying off cars early, making extra payments on their house) I find are not doing anything for retirement either. They have 2% interest savings accounts, but don't consider contributing anything to an IRA or 401K.

Bottom line: not as many people are planning for the future as you might like the think. My wife and I both have pretty decent jobs, and we contribute about 24% of what we make to retirement. What's REALLY going to piss me off is when my wife and I go to retire and find that we're going to somehow be responsible for funding the retirement for everyone who is currently saving nothing.
posted by ensign_ricky at 6:18 PM on February 22, 2005

I live in a suburban setting, and I agree with eas98 -- the apparent wealth is amazing. I am not in a rich suburb, but the amount of material goods people have, and the houses they live in, are out-of-this-world.

Most of my friends who live this way don't have $500 to their name (and have told me so). It makes me feel better to have a nice nest egg than to look in the garage and see two nice cars.

ensign_ricky touches on a good point -- it irks me that I will have to help fund all of the non-savers of this country.
posted by bagels at 6:23 PM on February 22, 2005

3) Selectivity. We tend to notice displays of weath and ignore evidence of poverty. ...
posted by googly at 11:29 AM PST on February 22

I think this is it. I recently read nickel and dimed, and if the depiction of very low income families is there, you won't see them because they literally spend all their time working in order to make ends meet. Count the employees at walmarts/maid services/denny's/etc and then compare them in number to teenagers shopping.
posted by advil at 7:27 PM on February 22, 2005

What Dreama said. I just read an article about young, pre-kid professionals buying much bigger houses than they need because of the low interest rates.

lots of people get their expensive cars through their company.

That's how my dad drives this sick little Volkswagon R32. My folks are very conspicuous consumers (to my overall dismay) but they have very little saved. They lucked out by earning about $300K in equity on their house over just a few years. That's part of their retirement.
posted by recurve at 7:57 PM on February 22, 2005

Basically she just chose to categorize the groups that have gone up in spending as fixed costs, and called all the groups that have gone down in spending as discretionary.

I don't think that's right - the groups that she categorizes as fixed are those that have a set monthly payment that cannot be adjusted down in lean times. Of course, one can't eliminate food altogether, but the recently unemployed can cut back on food expenses. But your mortgage payment is what it is, and can't be reduced without selling your home.
posted by bonecrusher at 9:02 PM on February 22, 2005

Half of all U.S. bankruptcies are caused by medical expenses.

While medical expenses are certainly an important factor in a lot of bankruptcies, the "half of all" statistic appears to be wrong, upon close examination of the study which is being used as a source.
posted by WestCoaster at 10:47 PM on February 22, 2005

The one item of credit no one has mentioned here that finances a lifestyle disproportiante to one's income is that as was reported a little over a year ago, refinancing one's home and using it for consumer spending rather than home improvements or paying for a child's college education is now the norm rather than the exception.

Whether you subscribe to the real estate bubble theory or not, while some people *can* afford their homes and cars, a majority in my opinion have simply borrowed against what used to be their safest retirement asset, their home, to finance a more luxurious lifestyle. Overwhelmingly, comments about low interest rates whether from the Fed or mortgage commercials seem to encourage people to borrow against their homes over and over again.

True, some baby boomers are borrowing in the back of their minds against the inheritances they expect from a generation that saved (!) but as someone in the real estate industry, I can tell you that what all these 5% and no percent down payments have failed to consider is that even if there is the barest of 5 or 10% corrections in the real estate market, many of these people will be left with negative equity in their homes. And a 10% correction is nothing.
posted by RJ3 at 6:40 AM on February 23, 2005

Thanks everyone! A lot of good answers. :)
posted by eas98 at 7:56 AM on February 23, 2005

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