Nice paperweight you've got there. Photographer: Slobodan Vasic via Getty Images
Nice paperweight you've got there. Photographer: Slobodan Vasic via Getty Images

If you want to feel optimistic about U.S. saving habits, read this Medium post by a journalist who paid off six-figure student debt in six years (well done, sir!). If you want to be depressed, read this Time report on how poorly Americans have prepared for nursing home expenses. And if you want to feel downright despondent, check out the latest survey from Bankrate.com on how little people are saving right now. Forget socking it away for a nursing home; most people aren’t prepared for life’s current emergencies. Barely 15 percent of young people have six months' worth of expenses saved, and the overall average is less than a quarter.

Why can’t Americans save? No, don’t tell me that everything has gotten more expensive since 1970 while wages have stagnated. For one thing, incomes haven’t stagnated since 1970 -- no, not even in the middle or bottom. For another, things haven’t just gotten more expensive; we’re buying more expensive things.

Here’s what Americans spend their money on:

Bureau of Labor Statistics
Bureau of Labor Statistics

Here’s what their debt loads look like:

Federal Reserve Board New York/Equifax
Federal Reserve Board New York/Equifax

We’re spending most of our money on houses, cars, Social Security, insurance, groceries, and restaurants and other forms of entertainment. Our debt service goes first to mortgages, then to student loans, then to cars.

Yes, yes, you want to tell me, but the cost of those things has gone up! In many cases, this is not true. You can buy an entry-level car in 2014 for about the same price (inflation-adjusted) as a Plymouth Duster in 1970, and the car’s a lot better. Grocery bills have gone down, not up; so has the cost of a landline. Restaurants and travel are much cheaper than they used to be.

Then there are the things we’re spending more on because we’re getting more. Social Security contributions have gone up since 1970, but so have benefits. We’re spending more on houses, but the average size of a new home has increased by nearly 50 percent.

And then there are the things we are buying that didn’t really exist in 1970, such as cable and mobile phones.

College tuition, I grant, has gone up. If you look at either debt service numbers or household spending, however, you don’t see a nationwide crisis. You see pockets of problems -- people with expensive graduate degrees, people who start school and drop out, a small minority of people who attend fancy private universities on student loans. That can’t explain why so few people can manage to put together a decent emergency fund.

Rather, what we have is people spending more than they have to on the big basics. The average car loan, for example, is more than $25,000, and for people with the worst credit ratings, it’s actually higher: almost $30,000. This is not because you have to spend $27,000 to get yourself from Point A to Point B. It’s because people are pouring a big fraction of their income into driving something “nice.”

By the same token, raising your kids in a modestly sized home is not physically impossible. But we’ve come to regard as deep deprivation anything less than one bathroom and one bedroom per person. Cash-strapped people mention giving up vacations as if doing so were as great a sacrifice as giving up food or heat.

And don’t think that this is all driven by inequality. The Bankrate survey shows lots of high-income folks living paycheck to paycheck. If you look at the expenditure data, you’ll see that although people in the bottom two quintiles are spending more on housing and food, that's not enough to explain the overall trend. Americans are spending more on this stuff because we want to, not because we’re being driven to it.

So why do we want to? Some of it is competition for homes in top school districts. Yet that’s largely a regional phenomenon in coastal urban areas; it also can’t explain why we’re spending so much on cars and restaurants. So what does?

I’d argue that a lot of it is a consumption cascade. People think a certain level of consumption is normal for their income level, so they spend that money whether their income will support it or not. When a gap opens up, they cover it by cutting back on spending.

So the next question is, why do so many of us expect to consume more than our income will allow? And how can we stop? The answer to the first is that this delusion comes from multiple sources. The answer to the second is to identify those sources, then resolutely ignore them. So here’s my list of why people think they can spend more than they should:

  1. Parents: People think of whatever they were raised in as the baseline for a decent life. In other words, they think they are supposed to start where their parents ended up. But your parents took decades to attain the lifestyle that you now think you’re supposed to reach in your mid-30s at the latest. I grew up in the house that my parents bought in their late 20s, when the house was a wreck. They had to spend years fixing it up. Only I largely don’t remember the fixing-up process; I remember what it looked like 20 years later, when I graduated from high school.
  2. Reference groups: You’re a writer living in Brooklyn. You want to be able to drink the same wine, read the same books and travel to the same places as other people in your circle. But some of those people have parents who are supporting them, six-figure salaries or book advances. Unfortunately, you don’t know that; you just see what they consume. Trying to emulate this is a very common financial disaster. “I just wanted to buy the things that normal people have" is a phrase that precedes a lot of financial pain.
  3. Movies and television: People in movies and television generally live at least 50 percent above the stated income of their characters. Their houses are large, spacious and airy. They eat at restaurants a lot. If they aren’t driving expensive cars, they’re driving cars that are (theoretically) cheap in a rare, funky way, like a 1972 Volkswagen Beetle. Almost no main character ever drives an 11-year-old Toyota with the paint peeling off the bumper, because that doesn’t read “cool person you’d like to spend a couple of hours with"; instead, it reads “not particularly beloved high school civics teacher.” Some of this is unavoidable: It’s nearly impossible to film in a realistically sized entry-level New York apartment, for example. The mechanics of filming favor large, square rooms with high ceilings and little clutter. Some of it is economic: Product-placement money has become a more important source of revenue for both movies and television, so characters consume a lot of products. And some of it is audience-driven. We don’t want to watch people who have cast-off furniture, stained rugs and cramped rooms. We can go see that by dropping in on the neighbor down the street. We want to see cool, interesting people, which means “poor” people living in $10,000-a-month Soho lofts that have had a bit of plaster artistically peeled off the lathes so that you can tell they’re poor. I mean, I’m sure that the house in “This Is 40” is actually what Judd Apatow’s 40-year-old house looks like. But for 99 percent of America, that’s wildly out of reach. The problem is, this seeps into our consciousness as what life is supposed to look like for cool people. So we strive to emulate it, even though it’s completely unrealistic on normal incomes.
  4. HGTV: This is a special category of “movies and television.” If you watch a lot of HGTV -- and what self-respecting middle-aged person doesn’t? -- you’re exposed to a stream of potential renovations, wherein they take a dump that looks a lot like your house and turn it into something out of Architectural Digest. It’s hard not to let this make you a little bit dissatisfied with your inadequate kitchen, cramped basement and dated bathrooms. To make it worse, the renovations are often quite unrealistic -- for one thing, they’re staged, with details that don’t show on camera often left undone; for another, they use donated products and free labor, which is a far cry from what your renovation is actually going to cost. The result is constantly renewed longing for $100,000 kitchens on a $75,000 salary.
  5. Sucking-hole neighborhoods: “We wanted little Sierra to be in the best possible school district, so we stretched ourselves to the max and bought a granny house in [wealthy neighborhood]. The renovations are killing us. The other mothers don’t understand that I have to work and I can’t stay home baking gluten-free, vegan cupcakes to bring to class; I barely have time for a Duncan Hines mix. And no, I can’t just go buy them at [wealthy neighborhood’s most expensive bakery] because the 25-year-old HVAC died and we’ve had to cut everything in the budget in order to replace it. Plus all the activities cost four times as much as they did in our old house, but what do I do with the kids in the summer if I don’t send them to the town camp? And all of Sierra’s friends are in travel soccer, and she’s getting left out and really sad because we can’t afford it. I think we’re just going to have to max out the credit card and do it anyway. Don’t even get me started on our cars and clothes.” I can’t tell you how many times I have heard some version of that complaint, from readers or people on personal finance boards. “Stretching” to move into an affluent neighborhood, aka buying the cheapest home in the best school district, is a favorite piece of advice for upper-middle-class strivers. Unfortunately, those places come with lots of other expenses. All the stores cost more, the school district requires that parents outlay substantial sums of money for trips and so forth, the service people look at your ZIP code and charge accordingly, and you are tempted to overspend to stop feeling shabby compared to the easy, unthinking affluence of everyone else you come into contact with. Many of those people are also overspending, of course, but you can’t see that. You can just see that you’re driving the only 11-year-old Toyota in the parking lot, and your kids are embarrassed about it.
  6. Colleagues in credit card hell: In 2009, I wrote an article on Dave Ramsey. The most surprising thing about the experience was the number of people who confessed that they lived paycheck to paycheck and had no idea where the money went. I’m not talking about entry-level assistants or people I knew well; I’m talking about bare acquaintances in solid two-earner couples -- all of whom had nice stuff. If they hadn’t said it, I would never have guessed that they were maxed out. And this is a problem for the people around them, who assume that if Tom can take a Paris vacation on his income, I must be able to do so as well.
  7. Looking at consumption individually: Tom may not be overstretched; he may be living in a cheap house and driving a beater, funneling his discretionary spending into the one thing he really cares about, which is European travel. But you probably have never seen his house. All you know about is the French vacation. One of the most common problems you see with people who get themselves into financial trouble is that they look at individual budget items and ask “can I afford this on my income?” And often, the answer is yes. The problem is that you can’t afford the European vacation AND the nice car AND the designer shoes AND the enrichment activities for the kids; you can afford one or two of them. If you approve each purchase individually, rather than in the context of a global budget, this may not be apparent until you’re short at the end of the month and need to charge the light bill on Visa. Because we don’t see other people making those trade-offs, it’s easy to forget that they have to be made.

Those are the long answers. The short answer is that Americans can save more if they do two things:

  1. Stop worrying about the “latte factor” and start worrying about whether you’re overspending on the big-ticket items, notably houses and cars.
  2. Stop paying attention to what the rest of society thinks is appropriate to your income level, and focus solely on what your budget will bear.

That’s not easy advice; most people would rather cut out a daily Starbucks than move down in house and car, especially where the neighbors can see. But in the long term, it’s the only road to financial sanity.

To contact the author of this article: Megan McArdle at mmcardle3@bloomberg.net.

To contact the editor responsible for this article: James Gibney at jgibney5@bloomberg.net.