You Could Be Saving $8,016 a Year - but You Probably Aren't

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Couple and children taking family picture
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If you're living paycheck to paycheck, with barely a dime in the bank, you've got lots of company. But you may have less excuse for not saving than you think, according to an Interest.com study: In fact, you've likely let yourself get sold by Madison Avenue on buying too much house, car and vacation when you could probably put away thousands a year.

"That savings opportunity gets spent on luxury items that [consumers see as] must haves." -- Mike Sante

Using data from the Bureau of Labor Statistics, the site compared 2012 median household income with median household expenses in 18 major metropolitan areas around the country -- including such notoriously expensive locations as New York and Los Angeles. In 16 of them, median families -- middle class people literally hallway between rich and poor -- have, on average, an extra $668 they could put away every month after they cover their normal expenses. That's $8,016 a year. And yet, the same figures show that in all these cities, median families literally save nothing.

That might be understandable in Phoenix, where the median family has to spend $95 more than it makes to get by, or in Miami, where income exceeds expenses by only $18. But for the other cities, that potentially bankable money ranges from $240 a month in Boston to a walloping $2,021 in Baltimore.

Spend, Spend, Spend

Because our incomes are greater than our expenses, the problem in most cities can't be stagnant wages constantly under attack from increasing prices, although both conditions exist, and are making it harder for American families to keep up. Nor is the issue that people can't afford a middle-class lifestyle. According to Interest.com managing editor Mike Sante, the real issue is the deadly combination of the constant din of marketing in three areas -- housing, transportation and entertainment/travel -- and the pliability of the American public.

"That savings opportunity gets spent on luxury items that [consumers see as] must-haves," Sante told DailyFinance. "What economists called 'must-haves' accounted for a little more than half of a middle class income back in the early '70s. Now, it's up to about three-quarters of their income."

The point is that passing up the occasional Starbucks latte isn't going to make a major difference in your ability to set money aside. The big-ticket expenses that crush family economics when higher-end upgrades cross into must-have territory are housing, transportation and entertainment/travel. In those categories, the difference between what you need and what you want frequently becomes a savings killer.

"They may spend more on housing than the median housing cost in their city," he said. "They might buy a more expensive car or take a [lavish] vacation." The impulse is the result of what economists call an expenditure cascade.

"People see through advertising and the media how wealthier people are living, and they decide that's what they want," Sante said. What they want, however, costs more than they can truly afford.

Yielding to Temptations

Unfortunately, a twist of logic lets them get sucked into keeping up with the Pierpont-Joneses. If a family has $600 left over at the end of the month, they convince themselves that they can afford to spend a few hundred more for a larger house like the one they saw on some cable real estate program, or maybe the upgrade from a Ford Taurus to a Lexus. "Car dealers are extremely good at [figuring out] how much disposable income you have and getting you to commit as much of it as possible to their profit," Sante said.

Or perhaps they take an all-inclusive cruise. But the cruise lines run art auctions, charge for port excursions and encourage the use of onboard bars and casinos. "This cruise only cost $800 to go on, but when you go back, you found you spent $2,000," said Sante.

The solution: Force yourself to be more sensible. The old advice that you should pay yourself first still holds. Take a healthy chunk of whatever extra cash you have left over each month after covering your "nut," and put it into a 401(k) for your retirement or a savings account so you have money to deal with emergencies. Avoid the temptation to trade up when the current level of spending is keeping the rain off your head and getting you where you need to go.

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53 Comments

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dailyfinancesux

In the past, this kind of advice was provided by your parents, the definition of 'necessities' and 'non-necessities' and would be considered common sense.
An article like this would not be necessary.
Necessity: Food, clothing, shelter.
Non: iphone, cellphone, car, TV, cable TV, beer, chocolate, fast food, dining out, etc.

The other problem, is restraint and willpower.
The key reason we are so much in debt both in terms of heath/weight, and finances.
Oink.

May 23 2014 at 4:33 PM Report abuse rate up rate down Reply
d.barack

Miltoon failed reading and comprehension 101. I don't support crooked politicians or their cronies. UNDERSTAND THAT.
.. You somehow believe one party is corrupt, and the other is not. I guess you have some really good medication.

May 19 2014 at 10:21 AM Report abuse -1 rate up rate down Reply
1 reply to d.barack's comment
mily469

i said you defend the banks in the post you are commenting on.

May 20 2014 at 9:11 PM Report abuse rate up rate down Reply
Allen

I ' aren't " because I was forced into retirement at 43 by three drunk drivers hitting me over a 7 year period . I lost my : health, job , home, and it wiped out my savings because they had no insurance . I'm trying to live on 1/3 of what I had planned on . So far I'm out 1.5 million in income and they are living in Mexico . But we don't have an immigration problem...my butt .

May 18 2014 at 3:32 PM Report abuse +3 rate up rate down Reply
1 reply to Allen's comment
jpfmtka

hello? Allen? Insurance has been available for any and every inedibility since the B.C.era. "They" had no insurance, hence your fate. Although we have never made a single claim, we have always carried LOTS of insurance. Uninsured driver, liability, comprehensive, full home and content replacement, insurance to provide for all housing and related expense in the event of loss and a million dollar umbrella to wrap things up. Again,planning is everything. I'd like to quote a comment made by a total loser several decades ago " All my problems have been caused by other people". Think on it.

May 18 2014 at 7:18 PM Report abuse rate up rate down Reply
mily469

we are living today with a broken and crippled financial sector. until we stop playing politics we will never overcome this.

May 18 2014 at 12:22 PM Report abuse rate up rate down Reply
1 reply to mily469's comment
d.barack

Broken and crippled financial sector ? WTF are you talking about ? The banks have never been stronger as they have been bailed out by we the taxpayers, and boosted up by Ben Bernanke and Yellen.
The private sector can't get a break, even worse now with the ACA, and added regulation to kill off more jobs. How's that for playing politics ?
Trust no Politician !!

May 18 2014 at 1:15 PM Report abuse +3 rate up rate down Reply
3 replies to d.barack's comment
ectullis

BHOzonomics is preventing me from saving anything.

May 18 2014 at 11:50 AM Report abuse rate up rate down Reply
1 reply to ectullis's comment
jpfmtka

Politics are not the reason you do not save, although the folks that complain are those who have failed to plan and find it convenient to blame the government. We are democrats, came from modest backgrounds, have always had a plan and goals, have never taken a dime of government assistance, and continue to save a minimum of $24,000 annually.

May 18 2014 at 1:07 PM Report abuse +1 rate up rate down Reply
njenel

my dear mother used to tell me that i have to budget, and i used to tell her that you need money to budget ! why do you think there was an explosion of credit the last 50 years ? it's because your boss can't afford you.

May 18 2014 at 9:17 AM Report abuse rate up rate down Reply
1 reply to njenel's comment
d.barack

Better get a rich boss.

May 18 2014 at 9:23 AM Report abuse -2 rate up rate down Reply
bmatthew30

I know it's difficult for some people to save anything when they are living from paycheck to paycheck. But I think that some people have a spend spend spend mentality. Some people spend their money as soon as they receive it. Some people don't know how to live within their means.

I'm retired now, and I had the foresight to save something for my retirement. I was mostly blue collar during my working years. Lower middle class. I don't have a pension, and I receive Social Security and Veterans Disability Compensation. I have enough to pay my monthly bills and have a little something left over for the month.

It took self discipline to be able to save some money. I'm debt free, and I pay off my credit cards monthly. I learned this lesson the hard way. Got myself into credit card debt, and was paying way too much in interest. I eventually paid off my credit cards, and haven't made the same mistake again. I only use reward or cash back credit cards now.

I know this is a tough economy, and some people are really struggling to make ends meet. I look for an edge to keep my head above water. Reward credit cards, BOGOs and coupons at the grocery stores, having a bank giving me $100 to start a checking account, etc. I think people need to think out of the box a little bit to try to stay ahead of the curve.

May 18 2014 at 4:51 AM Report abuse +5 rate up rate down Reply
1 reply to bmatthew30's comment
Dan

Those are hard lessons to learn. I was in my 50's before I finally wised up. Retired at 66 and I save about half my monthly income now. Feels good not to have to borrow money for every little thing that happens. My older daughter is in her 40's and still hasn't gotten it. I'm trying my best to gently head her in the right direction, but it's hard.

May 18 2014 at 8:43 AM Report abuse +3 rate up rate down Reply
Nanarina

Where in the world did they come up with the savings for Baltimore? I lived in Baltimore and believe me when I say that most people here are struggling to make ends meet. Everything has gone up here! Our taxes has skyrocked in the last five years. Housing is at a standstill. People are loosing their homes here in waves. A lot of companies that were here have left the area due to the new Maryland tax laws and many people are out of work. People here do not make that kind of money were they can save over $2000 a month...better go back and do some more math and/or checking out the economy for the every day life of us living here.

May 18 2014 at 3:36 AM Report abuse +4 rate up rate down Reply
slop9124

Liveing from check to check for soo long just led us to keep trying to get the most we can for a dollar. My wife says I'm cheap and I tell her OK I'll go out tomorrow and buy that brand new red p/u truck I've always wanted. She says go ahead but I know if I do I may as well just keep driveing the first time I start it. I had to retire twelve years ago at 55 because of medical problems. I got disability social security and had to take a 40% pension from my job rather than 50%. I wasn't sure we could do it but after takeing everything into consideration, we were better of than when I worked. After I left work I found I made out better by takeing the early retirement benefit because I no longer paid all those taxes every month. Social security amounted to about the same as my former take home pay and since I was on the road working I was saving money on expenses. I had no debt to speak of, house paid off and no big credit debt. We received some inheritence since I retired, not a fortune but enough to build up some savings which we had little before. We don't live lavishly so we save even more. Our house is over 50 years old but in a nice area I have three vehicles two '96 and one '10 paid for. The problem today is everything has skyrocket while income couldn't keep up. Most people starting out today live on credit and want all the latest gadgets. For the cost of a basic p/u truck today, I could have paid for my house almost twice in '72 just prior to real estate growing through the roof. I took the car for service at a dealership about a month ago and while I waited I went into the showroom to look at this nice shiny new truck and as I busted out laughing people looked at me and I said any fool that pays 51 grand for a truck is an full blown idiot no matter how much money he's got. That's why we no longer have a middle class just those who are dirt poor and those struggling to stay afloat and the rich people. My American dream turned into a nightmare in the middle 70's as did most average Americans. I couldn't get a credit card when I was 20, but now anybody who can sign their name can get one and that's how most Americans exist today...put it on the plastic.. A savings account today won't even pay you 1% but the bank will loan you plenty at about 12%. Home mortage rates are the lowest in history but most people would have to rob that bank to come up with the necessary down payment. Pork n Beans rice and weiners folksthat will help you get by, it was one of our favorites for a very long time. Good luck and keep the chin up.

May 18 2014 at 1:20 AM Report abuse +4 rate up rate down Reply
Hi Den

This doesn't apply to most people, just look at the comments on this board. Americans are struggling to maintaiin a modest standard of living, and the middle class is dissolving right in front of us. We have allowed our goverment to become a big bloated monster, devaluing the currency, over regulating, over spending, creating massinve debt and stealing our hard earned money through taxes. Sorry folks, unless there is a big change in way this country is managed, you can expect further decay and Detroitism is coming your way.

May 17 2014 at 1:58 PM Report abuse -1 rate up rate down Reply
1 reply to Hi Den's comment
jpfmtka

I disagree, Den. Unless there is a big change in the way people plan for their futures, both short, middle and long term, they can expect further deterioration of their lifestyle and their own futures and that of their children. Your situation is that of your own design.

May 17 2014 at 2:11 PM Report abuse +2 rate up rate down Reply
1 reply to jpfmtka's comment
njenel

wrong,inflation is a hidden tax. Gov overspends, high prices are caused by more dollars than there are products not wages. the Gov needs money so it prints it. we were warned in 1950 to reign in Gov spending OR there wouldn't be a country or a Government anymore as you know it!

May 18 2014 at 9:17 AM Report abuse -2 rate up rate down