August 18, 2017
Where in the world do Americans spend their money? Taking a look at where incomes go each month
MB 360–I remember the first budget I put together. It left me feeling depressed and feeling as if I had been punched in the gut. The practice was done largely out of necessity but there was something that jumped out at me. Housing consumes a good portion of net income. For most Americans this is the reality. When we look at spending habits we realize that half of this country is living paycheck to paycheck. A budget is a basic necessity even if you do it just once to understand where your money is flowing. Yet most people spend money as quickly as it comes in like sand flowing through your fingers. I wanted to look at the latest spending breakdown of Americans to see where most of our money is going.
Where do Americans spend their money?
There are three major categories where Americans are spending their money: housing, food, and cars. These three items consume the bulk of net income. And keep in mind that with housing, more Americans are renting since housing values are once again high relative to incomes. This makes it tough to build equity and most Americans have their net worth tied up in housing. Food and cars also take up a healthy portion of your paycheck.
Take a look at this chart:
The BLS chart tries to break down categories based on how your typical American spends their money. 43% of their weighting is given to housing. What is interesting about housing is that it is measuring the owner’s equivalent of rent (OER). The issue with using this as a measure of home values is that it assumes all owners are renting out their homes and it doesn’t factor in the large Fed intervention on interest rates.
Interestingly enough, transportation actually edges out food in the BLS chart. Transportation makes up about 15% of the BLS basked of goods. Buying cars and financing them has become a big part of our economy. Over $1 trillion in auto loans are outstanding. You also have a large part of the auto market now being financed by subprime auto loans. So what you have is people spending beyond their means for transportation.
Finally you have spending on food at slightly below 15%. There was an interesting milestone crossed last year in that Americans now spend more on eating out than they do on grocery shopping. More Cheesecake Factory and less meatloaf at home. Part of this has to do with younger Americans and their spending habits but also the changing way people live their lives.
It is still surprising how much money goes in to tobacco and alcohol. Then look at how much goes into reading. Nearly 8 times more is spent on tobacco and alcohol. Reading is a great way of opening your mind and exposing you to new ideas. Being critical and skeptical are skills that are developed but also knowing how to manage your money. That is the point of all of this and yet some people continue down a path of spending more than they have.
This doesn’t even look at the $1.4 trillion of student debt and how young Americans are deeply mired in school loans before they even start working. Some people live paycheck to paycheck because they have little money and some live paycheck to paycheck because they spend beyond their means. We do live in a consumption based economy and the above highlights were Americans are spending their money.