Paying down debt is a lovely idea. Who can argue with financial advice to live a debt-free life? But it’s bad advice — and perhaps even cruel advice — to people who struggle just to pay the bills every month. And there’s a lot of you.
Here’s the reality crushing those family monthly budgets. Real incomes have been stagnant for a generation — and according to some measures, since Americans landed a man on the Moon. Meanwhile, the price of basics like housing and health care have soared. For example: The number of Americans who pay close to half their income on rent is up 37 percent in the past decade, and their ranks are swelling (anything over 30 percent is considered “rent-burdened.” Fifty percent is toxic). When you start the month that far in the hole — cash flow negative, as a corporation would say — there’s no money left over to pay down credit cards and student loans.
It’s a reality that’s easy to observe. Here’s all you need to know about the fragile state of the American middle class. An online payday-type lender named Elevate Credit sees the middle class as its target market.
“Decades–long macroeconomic trends and the recent financial crisis have resulted in a growing ‘New Middle Class’ with little to no savings, urgent credit needs and limited options,” the firm says on its website.
Here’s another way to express the problem. About 60 percent Americans are unsure they could come up with $2,000 if an emergency hit. How could anyone in that group have cash left over at the end of the month to make extra debt payments? In fact, folks in that situation should be building up their emergency savings before making extra student loan or car loan payments.
The Pew Charitable Trusts recently tried to dig even deeper into monthly budgets to understand what was going on, and came up with more precise figures for this “more money is going out than coming in” problem. From 1996-2014, average annual housing costs for Americans swelled from $12,300 to $17,000. Health care costs jumped from $1,119 to $2,560. But incomes barely budged. As a result, “slack” — or money left over at the end of the month — is disappearing from the family budget, Pew said. On average, Americans spent 71 percent of income on the basics in 1996, and by 2014, it was 75 percent, and headed the wrong way.
No slack, no debt payments.
“This change in the expenditure-to-income ratio in the years following the financial crisis is a clear indication of why and how households feel financially strained,” Pew said.
Something has to give.
Often, that “something” is said to be a latte – an easy target as symbol of youthful spending excess. OK, sure. Drop the Monday-Friday $4 latte habit. But let’s be clear: That’s not going to get you out of debt. It’ll mean $20 less spending each week; or about $80 a month. Real money, for sure, but lattes aren’t digging your financial debt grave. For many people, the basic cost of living does that.
A few years ago, I asked my website readers to mail me their monthly budgets, and thousands did….