It looks like the inevitable has finally caught up with us: the American Dream is no longer affordable. We’ve heard about the possibility for years, and according to a new study put together by USA Today, a six-figure income is what it really takes to put all the pieces together. In fact, the exact figure is $130,357, which they arrived at by calculating the cost of a family’s essential expenses, some extras, and taxes/savings. Now, this is what they found was needed for the average family of four — two adults and two children.
If $130,000 seems like a lot, that’s because it is. Even with two adults working full-time, that can be a number out of reach for most people. According to the U.S. Census Bureau, median householdincome between 2008 and 2012 was $53,046 per year, less than half of what the USA Today study calls for. While the economy has been picking up steam as of late, it’s still not the same situation that led to prosperous years for the middle class during the 1990s.
The biggest issue — and the factor that is putting the ‘American dream’ out of reach for the vast majority of people — is that they simply do not have the financial power they did before. The cost of living has been skyrocketing over the past ten or fifteen years. Just about every standard purchase, whether it be for a home or for a gallon of gasoline, has seen prices jump dramatically. Food prices are also through the roof, along with healthcare costs and transportation.The other side of the coin is that wages and compensation have flat-lined. As everything else has gone up in price, wages really haven’t budged, leading to erosion of purchasing power. Ever wonder why so many retail stores and restaurants closed over the past five years? It’s because those in their target demographic, the middle class, simply don’t have the money to go there anymore. The Economic Policy Institute looked deeper into the issue, and found that flat wages and job losses have been the major barriers to economic prosperity for many in the middle class.
“This lost decade for wages comes on the heels of decades of inadequate wage growth. For virtually the entire period since 1979 (with the one exception being the strong wage growth of the late 1990s), wage growth for most workers has been weak. The median worker saw an increase of just 5.0 percent between 1979 and 2012, despite productivity growth of 74.5 percent — while the 20th percentile worker saw wage erosion of 0.4 percent and the 80th percentile worker saw wage growth of just 17.5 percent,” the EPI says.
Eroding wages and increasing costs — this is the intersection that is causing the middle class to disappear. Most of the middle and lower classes in the U.S. have been sold on the idea of the ‘American dream,’ and have worked hard to attain it. Putting it out of reach, all the while expecting people to continue buying into the ‘meritocracy,’ is going to eventually come back to bite you.
The Bare Necessities
Getting back to the USA Today study, the essentials that are mentioned are the basic tenants of life in modern America. The study tallies up several different price points — $17,062 for housing, $12,659 for groceries, $11,039 in vehicle expenses and just over $9,000 per year in medicalexpenses — all to get a subtotal of around $58,500 for the essentials. That alone is above the median household income.
There were a few other things taken into account: apparel, utilities, and education expenses, but the items listed above were the major price points. There is also a sound argument to include things like Internet and telephone service in this category, as they are required for daily life by most. Instead, they were listed under the ‘extras’ category.
One other area that is not taken into account that the majority of the population is dealing with is debt. Credit card debt and student loans, neither are put into the calculations. It’s possible that these could be factored in to things like education expenses, or miscellaneous expenses, but for a lot of people, debt repayment represents a big monthly expense. According to Nerdwallet, the average American’s credit card debt tallies up to more than $15,000, and student loan debt is more than $33,600.
These are things that should also be figured in.
Moving away from the bare necessities and on to the ‘extras’ category, USA Today figured in things like family vacations, entertainment, eating out at restaurants and cable/Internet costs. All together, the end figure totaled more than $17,000 per year. Now, right off the bat many people will say there are plenty of costs that can be eliminated in this category, and they are correct. For example, more than $4,500 is allocated for family vacations, which can be drastically reduced in a number of ways.
However, things like Internet expenses are more appropriately filed under the ‘essentials’ category. A great deal of individuals rely on the Internet for work and school, and many of us really can’t imagine life without some sort of online connection. There are ways to curb the cost as well, by using public libraries or coffee shops with public wi-fi access.
As far as entertainment and eating out is concerned, there is always wiggle room to cut down thebudget. Entertainment especially, which can be heavily reduced through modern technology. Again, public libraries have vast book and movie collections, available for free many times. ANetflix (NASDAQ:NFLX) account can supply hundreds, if not thousands of hours of entertainment for less than $10 per month.
There are ways to chip away at the ‘extras’ category to save some money. But even with money saving methods in place, it’s still an area that will incur unexpected expenses and cost families plenty over the course of a year.
Taxes and Savings
The final category looked at in the study is that of taxes and savings. The former everybody takes part in, the latter, well, most people hope to take part in. A lot of people saw their savings ruined by the financial crisis, in which either banks gambled it away, or the loss of a job required those who had a safety cushion to actually dig into it. As the economy rebounds and more people get back to work, setting aside money for a variety of savings accounts should become a common expense in many households.
USA Today pegs the total cost of tax and savings annually at $54,857. The majority of that figure — $32,357 — comes at the cost of state, local, and federal taxes. Of course, there are many ways to reduce that tax bill, but that is the number they landed at. The other large expense lands at a figure of $17,500, which is attributed to 401(k) retirement savings. Assuming you are contributing the maximum amount, that is roughly the number USA Today came up with.
Finally, college savings for two children tallied up to $5,000 per year. Of course, as the cost of education increases every year, saving even that much annually probably won’t leave the kids with enough to pay for their education. As disheartening as that is, college savings may be an area that should be increased in the calculations.
These are the major expenses that USA Today‘s study looked at to arrive at their annual figure of $130,357. Sure, many things are debatable, and there are some expenses that were not taken into account, while others could be reduced through consumer choice and money saving tactics. One important thing to mention is that it’s not just about building wealth and getting rich, but also about securing a future for the next generation.
Speaking with USA Today, Cornell University professor Thomas Hirschl made that point very clear. “It’s not about getting rich and making a lot of money. It’s about security,” he said. “They want to feel that their children are going to have a better life than they do.”
SAM BECKER | JULY 12, 2014