There has been a lot of bad news recently about how Americans are surviving by raiding their retirement plans, maxing out their credit cards, etc. For example, I read one such article which dwelled on this. According to it, more Americans are raiding their 401(k) savings plans. It quoted a July study, released by the Center for American Progress, which found that workers in 2004 had $31 billion in outstanding 401(k) loans, a fivefold increase from $6 billion in 1989. From 1998 to 2004, an average of 12 percent of families with 401(k) plans borrowed from them.
At first glance, I noticed one item about this article that caught my attention. It used data from 2004. That was odd, I thought! This spurred me to check further into the source, which is a "think tank”. So I decided to check the data further. I discovered another, more reputable and current article. In an August 19 article in “Financial Week” data was cited and financial sources named, which indicated that more workers are shunning 401(k) loans. According to that article, both the number of outstanding 401(k) loans and the number of workers initiating such loans is decreasing.
This got me to thinking. I know people are dealing with increasing energy prices, increasing food prices and so on. I keep records of our recurring bills. I have the hard evidence that the cost of living which includes our groceries, natural gas, electricity and so on has increased over the past two years. I have also read in the media that in real terms, “many” people are not earning more than they did last year. I am talking about ordinary workers; such as people who are earning the median wage in this country. I'm excluding high wage earners, billionaires, hedge fund managers, etc.
So how are these ordinary people, one of whom I consider myself to be, coping with the onslaught of price increases? If they are coping, then at what point will it be impossible for them to continue to cope. And, at that time, what will occur? Will the wheels of consumerism in this country simply grind to a halt?
I can’t speak for how others are coping, but I can speak for myself. First, I am spending more this year than I did last year. I define some of that spending as discretionary. For example, my spouse and I have taken three trips. Two were with family and extended family members. One was a week long getaway which also included a family visit. These trips were all discretionary. I assume other families are coping by monitoring discretionary spending and by adjusting that. Perhaps the definition of what is discretionary and what is not, is currently changing in America. My definition may not be that of the typical American.
At this point, I will have to go off topic. If I were asked “what do I know about discretionary spending” that would be an appropriate question. What follows is my answer, from the perspective of my personal spending.
I keep detailed financial records, including earning and expenses by category. These are presently in Quicken software. Prior to that, I used manually generated spreadsheets. I started doing this about 20 years ago. The information I gleaned from this exercise and the financial discipline it enforced is how I survived my divorce. How difficult was it? I should have gone bankrupt. In fact, when the divorce negotiations were complete, I told my lawyer there was no way I could survive. I had done the numbers. However, that was a Nietzschian moment and somehow I did survive, although 14 years later I was still cleaning it up. How can I in a few words describe my divorce? How about “Mortgaging Your Future in One Easy Lesson”? In truth, it was not the divorce that did it. It was the divorce and the 15 years that preceded it. From personal experience, I am clear that it is possible to dig a really deep financial hole over the span of only a few years.
Somehow I did not go bankrupt and I even honored all of my debts. I negotiated payment plans with all of my creditors, moved the debt around, and so on. It took over a decade to clean up. During that period I personally redefined the term “discretionary spending”. During the first few years I had a total of $75 per month budgeted for my food, clothing, household, toiletries, phone, internet and entertainment. Forget about vacations and dining out. Simultaneously I took on more debt to pay for the kids’ college. This gave me additional incentives to keep working. It also extended the time it would take to achieve "freedom from debt", assuming I stopped taking on any additional debt.
This terrible process was in some respects a godsend. I learned a lot about what discretionary spending really was. For a long time, going to Dunkin’ Donuts was a discretionary expense; don’t even think about Starbucks! My spread sheet was arranged with one month per column and with rows listing creditors first, then alimony, rent, electricity, water, health insurance, auto insurance, vehicle license, gasoline and a monthly savings amount to provide for projected auto maintenance (oil changes, pro-rata monthly cost of brakes, maintenance at 20,000 mile intervals, tires, licensing), medical, dental, taxes, college tuition, fees, dormitory expense, dependents’ travel expense for college, dependents’ health insurance, and finally entertainment. Then there were some rows for any additional items. The amount in each cell was updated weekly. Rows were added as different expense categories became apparent. Projected numbers in columns going out 5 years were updated as real data was acquired, insurance premiums changed, etc. This was banged against my net income each month, and savings (if any). At the bottom of the spread sheet was a single cell containing a number which represented my financial status. If it was a positive number my spending would be less than my income for the next 12 months. If negative, my spending would exceed my income.
Each day, I literally tracked every nickel in my pocket. It could have been worse. I could have been tracking grains of rice, as they do in many poor households in this world. The bad news was, the financial status number was always negative. So work more and spend less. Of course, I had built in so much debt, it didn’t matter if I stopped spending or not. I could and did stretch out as much debt as possible. At the time, I was extremely fortunate. Credit was readily available and cheap. So even though my net worth was a negative number and would continue to be, I could creatively stretch out debt.
As I retired debt, I had the option of moving the released funds to purchase “discretionary” items, or to save it. How did I survive? Well, it was a long, long road. But eventually, that cell in the spreadsheet containing my financial status number became consistently positive.
I did remarry and my spouse is a really good partner. She and I have discussed that question. Was it luck? Was it the “will of God”? I don’t know. I do know that if I had not been healthy I would not have survived financially. I took many risks, but good health permitted me to continue working, at times incredible hours (for example, 30 consecutive days averaging 12 hours per day). Good health permitted me to avoid our costly health care system; I had and still have a major medical policy which pays for very little. I consider it to be “catastrophic insurance”. So avoiding doctors keeps my bills to a minimum. For years I could not afford a dentist, medical checkup or even new prescription glasses. As I dug my way out of the pit I had constructed I paid off creditors. That released money for the eye exam, then the dentist, and finally 10 years later, a medical exam. During this entire period I kept my “nose to the grindstone”. At times I was ready to give up and nearly stopped, but I never did. My spouse tells me that when she first met me, she noticed that I was gaunt, a gray man wearing gray clothes with glasses held together with electrical tape. I was fading.
Even though I could say I had no choice in the matter that would be untrue. We did spend the money. In cleaning it up, I also decided to honor my debts. I decided to support my children in pursuing their college dreams.
In the end, a discussion about discretionary spending is really a discussion about choice. We choose many aspects of our lives. We choose where we live. We choose the electronics and entertainment we spend our money on. We choose the vehicles we drive and we choose the frequency we drive them and we choose how far to drive them. This is one example. If I choose to live 75 miles from my place of work, with that choice there are attendant lifestyle and budget choices. Driving 150 miles per day requires allocating substantial financial resources to the fuel, maintenance and replacement costs of an automobile. That is a choice predicated on some assumptions. The cost of gasoline will never go up or if it does, I’ll still be able to afford it. Driving my car 39,000 miles each year to and from work is an expense I can afford, and I can afford to replace that vehicle every three years, etc. etc.
When I was in New Orleans prior to Katrina, I was told by people I met that they loved that city and would never leave it. After Katrina many people did make the difficult choice not to return. That is the way it is with choice. We can choose how we are as we live our life, or we can have circumstances choose for us. Either way, it can be difficult.
Currently, what we may be experiencing is the reaching of the limits of spending for the American family. But if that is so, what might happen next? If I reach my limits and go beyond the threshold of pain, then what? And how will I deal with it?
Continued in Part II.
