Families Are Not Filling Their "Piggy Banks"
by Tracy Levine - November 3, 1999
(This article is one of a series by Tracy Levine on health,
families and education)
Families are under more financial pressure instead of less, despite dual income earning families. The savings rate is (perhaps not surprisingly) down by 94% over past years. We all know that retirement benefits and social security are just mirages. There is no relief in sight. The knight on a white horse won't save us from this…
According to Mike Hodges, author of The Family Income Report, we are in big trouble.
Even though we know that the government is not going to "save" us, we are still so busy living in the present, we are not truly planning for the future.
We're living in times when most families (of the remaining "traditional" families), do not have the option of one parent working. Both have to work just in order to make ends meet. Plus, many families are not satisfied with the quality of the public school system, and are having to pay hefty tuition fees for private schools, starting at age three and continuing through high school. How do we pay for this and save for college and even contemplate retirement planning?!!
Mike Hodges authored The Family Income Report, which is one of many reports he has published on the Internet (http://mwhodges.home.att.net/) concerning economic trends. An analyst, grandfather and retired businessman, he has studied trends related to families' financial planning. He has published the information as a public service. His hard data evidence tells us what we already know: we are not getting ahead, but he also goes on to tell us why and what we can do about it.
During the years of 1947-1970, inflation-adjusted incomes were rising and families' savings rates were as well. During 1970-1997, however, family's inflation-adjusted incomes stagnated, debt rose and savings went down dramatically - despite the fact that there were two wage earners in the family.
Tax rates increased at the federal and state levels. In fact, the tax rate jumped from 2% to 25% in the last four decades for a family of four at median income level - an increase of 1,250%. (Data from Family Research Council, October 1996, Steve Forbes).
We all know about the "Marriage Tax"…the Tax Report in 1996 showed that 43% of couples were penalized by tax laws for being married. We all "contributed" an extra $28 billion in taxes that year!!
How many moms are working? In 1950, 11% of married women with children under the age of six were working - - in 1995, it was 64%. And 76% of moms of children ages six to 17 were in the labor force in 1995.
Naturally, many women want to work and enjoy their careers - but it's nice to have the option to take some time off. Some moms might want to take some time off with their baby, or need to jump in and tend to a troubled teen. Others might just want to take a sabbatical, or change jobs or careers. Such an option is an impossible fantasy to most of us.
The real (disposable) income of males has also declined as Census Bureau data (2/29) shows. Why did income stagnate with moms joining the workforce? According to MIT economist Lester Thurow (Economic Policy Institute symposium, Washington), most of the job growth has been in the service sectors where employees are usually working only part-time and therefore, also are not eligible for benefits.
On April 15, 1997, newscasts reported that for 1996 the average citizen had to work 5.3 months of the year just to pay all his or share of combined federal and state/local government taxes - compared to just 1.4 months required of workers several generations ago. That's a 400% increase in tax-work load - which consumes 44% of an average worker's entire working time each year!
Mike Hodges said: "If families have less inflation-adjusted income, even with both parents working, then family personal savings must suffer as a consequence - unless of course families reduce their consumption and taxes. "
The Report shows that the savings rate dropped by 94% over the last two decades. The 1998 savings rate was only about 0.6% of disposable income. Lower rates of savings, plus higher rates of household debt fuel more national consumption -good for the economy but bad for familes.
"Americans have not saved so little since the depression of the 1930s, they have been on a spending binge, well beyond growth of their incomes," (The Economist, 8/8/98).
And, incoming data for 1999, reveals the frightening news that savings have now moved into a negative territory, What does this mean? Not only are Americans not saving, but they are also drawing down -- on credit…
"Payments on consumer debt (mortgage loans, credit cards and car loans or leases) are at an all-time high as a percentage of disposable income." (Robert Rands, The Vanguard Group, 1/97).
People are keeping up with the Jones' and maintaining standards of living by expanding credit - credit cards and the even more dangerous form of credit - home equity loans. At the same time, families face less social security/Medicare benefits when they retire (than their elders), many head toward their golden years in debt and with lower home equity. (The Family Income Report)
"Affordability has worsened over the past 20 years for families trying to purchase a home because incomes have not kept up with rising housing prices. In 1976 almost half of all families could afford to buy a median-priced new home; in 1996, just more than one third of families had enough income to make a purchase." (Source: National Association of Home Builders.)
Note: This decline was despite the drop in average fixed 30-year mortgage interest rates - from 8.9% in 1976 to 7.7% in 1996 and despite the dual-income issue.
"Owner's equity as a percent of household real estate values fell to a postwar low in 1998 of 56.1%. This suggests that a lot of folks were spending a lot of the built-up equity in their houses." (Data from "Housholds Mortgaged to the Hilt" by Paul Kasriel, The Northern Trust Co., June 1999)
Mike Hodges says: "Today's young families are paying about 48% more interest every month on the same level mortgage, compared to 1960. That's an impact!"
So what do we do? It sounds like most of us are dead in the water. Certainly, our climate encourages consumption through advertising ("you deserve it!") and the stress load of the everyday grind lures us to spend (a little - or big shopping spree or expensive vacation can temporarily ease that stressed out feeling). Many of us suffer from that overall frustrating sense that we are on a treadmill - getting nowhere fast - so what the heck…it's only money, right?
This is part of our human psychology and it is true that the decks are stacked heavily against us getting ahead - but as Mike Hodges, says: "It's not how much you make each year that is important, it's what's left over…"
You live in a beautiful home, drive the newest cars, have nice clothes, take vacations and go out to fine restaurants - but your savings account wouldn't see you through three months' of hardship…is this you?
It's time to buckle down and try to squeeze the savings out drop by drop. Following are some points offered by The Family Income Report. Please refer to the website for more information and charts (http://mwhodges.home.att.net/).
Families should - -
1. Become debt free except home and investments Provide the highest quality education
for your children - both in grade school and college
2. Build own savings and retirement funds with the goal to have your principal residence free and clear by age 45.
3. Eliminate all consumer debt and automobile leases, including any financed via home equity loans.
4. Develop savings plan to 5 times annual gross income, and then create an investment plan for savings, for education, leisure and retirement.
5. Develop a mentality to depend on yourself, and maximize self-employment where possible or at least plan your career to gain the necessary practical knowledge to become your own boss one day.
6. Make all possible efforts to organize the cost of living and size of one's house based on the income of only one family member.
7. Do not take on any debt other than for education of children and/or for hard assets (such as residence or investment properties), with plan to amortize debt quickly.
8. Do not fall into the trap of 'keeping up with the Jones', as the Jones' are probably consuming beyond their means and may not be successful in the long run.
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