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

×
Couple and children taking family picture
Goodluz/Shutterstock
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.

Increase your money and finance knowledge from home

Introduction to Retirement Funds

Target date funds help you maintain a long term portfolio.

View Course »

Introduction to Preferred Shares

Learn the difference between preferred and common shares.

View Course »