It is common knowledge that American’s aren’t the best at managing their finances. We tend to overspend, under save, and live life like tomorrow is not guaranteed. However, advances in health care are extending life expectancies, so for most people, tomorrow is more or less guaranteed. Unfortunately, we often don’t take the time to think about what tomorrow might cost. What’s the fun in that? The result is that a rough financial road likely lays ahead for many Americans.
A recent research report revealed that after adjusting for inflation (the rising cost of living in the US), the average annual income in the US is the same as it was in 1970. That’s 48 years of innovation, economic growth, rising stock markets, yet the standard of living that the average American can afford has gone nowhere. The cost of living has risen at the same pace as wages. So, how is everyone “Keeping up with the Joneses?”
Unfortunately, many people turn to debt to boost their standard of living. Debt in and of itself is not bad, if managed correctly. However, it appears that we are once again on a bit of a debt binge. Student loans, auto loans, credit card debt, even mortgages are all at record levels. Many are far beyond where they were in 2007 prior to the Financial Crisis.
Eventually, all that debt has to be paid back, and there is trillions (with a T) of it. As of mid-2018, consumer debt totaled more than $18 trillion dollars. That’s $18 trillion dollars that cannot be spent in the future on maintaining our standard of living. It breaks down to roughly $51,400 per man, woman, and child. However, not every man, woman, and child, has a job and can pay the debt back. If we divide the debt amongst just those that are in the labor force, we get to $111,000 per person.
Keep in mind, this is only consumer debt. It’s widely noted that the US Government is shouldering a record debt load as well. US Corporations are not different.
To be clear, this isn’t the end of the world. It is manageable, but manageable isn’t comfortable. Eventually, all that debt will have to be paid back. It won’t happen overnight, and it won’t happen even over a decade. However, as it is slowly paid back, the standard of living for many American’s will likely decline. It’s just math.
Not everyone will have to deal with this problem. The silver lining in all this is that you control your finances. You can determine how much debt you have and how much you save. The real problem comes when you can no longer work, and you haven’t properly planned.
As life expectancies increase, the number of years the average American will spend in retirement is likely going to rise. Coupled with the fact that the cost of living continues to rise, the true future cost of retirement is far more than most people think.
It’s often stated that the average American needs one million dollars to retire. Unfortunately, due to inflation, the number for many people is likely higher. If you enjoy an above average lifestyle it could be much, much, higher. What is “average” these days? According to the US Census Bureau, in 2016, the median household income in the United States was $59,039. That’s not a lot especially compared to the mountain of debt we have racked up.
While many American’s continue to chase the Joneses, many are sacrificing their future. They just don’t know it yet. It’s just math.