Many people are finding it difficult to save money. Although our spending habits (among other factors) can determine how much we can save, there is genuine concern by middle income family households and millennials when it comes to saving money. The statistics outlined in my previous post give a glimpse to the severity of the savings rate crisis. Are we as a society opting to spend more than the generations before us? Do we lack the discipline and self-control needed to save? The response to these questions are partially subjective and up for debate. There are may be a number of reasons why one is not able to save. However, I will address three reasons that may have impacted our ability to save from a societal view point. In a subsequent post, I will discuss how we can still work past these limitations and save.
Average household income over time
When it comes to saving money, it is not how much you make, but how much you save that determines wealth accumulation in the long term. The Millionaire Next Door by Stanley & Danko provides empirical evidence to this truth. However, to disregard income would be to ignore a critical part of the equation, income – life expenses = savings. So how has household income changed over the last few decades in North America and what might this say about our ability to save money?
In the United States average household income over 45 years from 1967 to 2013 adjusted to 2013 dollars has seen little change since 1989 (US Census Bureau- The New Yorker). As illustrated from the graph below there was much volatility in income in the 1970 and 1980’s then some growth in the 1990’s to early 2000’s only to find its way back down in 2013 to $51,900. This is alarming because it reveals in a quarter of a century (since 1989) income levels in 2013 are similar to what they were in 1989, adjusted for inflation. This number has seen a slight increase in 2015 (Economic Research).
Up north Canadians saw an overall rise in median after tax income from 2000 to 2013 from $45,800 to $53,500 based on 2013 constant dollars. This numbers accounts for economic families (a group of two or more persons who live in the same dwelling and are related to each other by blood, marriage, common-law or adoption) and person’s not in an economic family. This increase was not eventually distributed throughout all provinces. Resource rich provinces like Alberta and Saskatchewan saw the largest increase in their after-tax income compared to Ontario which experienced income growth lower than the national average (Statistics Canada). This amount increased to $55,600 in 2014. Based on the graph you can see the slight slope down in 2008-2011 due to the economic recession in 2008.
Cost of living
Many people evaluate the changes in the cost of living by looking at the consumer price index (CPI). The consumer price index measures the changes in the price of a basket of goods and services purchased by households over time. It represents the purchasing power that consumers have. Changes in the CPI are used to assess price changes associated with cost of living (Investopedia). The higher the CPI the lower your purchasing power (the ability for you to get more goods/service with the same amount of money).
In examining the changes in CPI over time the chart below shows how our purchasing power has eroded. From 1947 to 2016 you will notice that the time it took for CPI to double (or for the cost of goods to double in price) was much shorter in the recent decades. Generally speaking, if you purchased an item in 1947 it would take until 1983 (36 years) for the item to double in price. Contrast this to the recent past where it took only 28 years (between 1983 to 2006) for an item to double in price. This can be seen by the relatively flat line followed by the upward ascent in the 1980’s (label 1 & 2 on chart).
As salaries stagnant and our purchasing power (CPI) is eroded we may be faced with a dilemma that may limit our ability to save money.
Rising house prices
The difference in house prices between Canada and the United States is substantial as outlined in this chart from the Globe and Mail. Canada’s steady upward ascent in house prices may mean more money used to pay for housing costs than our neighbours in the south. Of course the carrying cost of owning a home is significantly reduced with a sizable down payment. However, as many millennials are struggling to pay off their student loans, setting aside money for a down payment becomes more and more problematic. Even though there was a slight drop in house prices in Canada in 2008-2009, the drop was not as substaintial or long lived as in the Unites States. In Canada, historically low interest rates have also made carrying a mortgage more affordable. Lower monthly mortgage payments may have facilitated the continual rise in house prices as the same income can now afford a higher priced house, driving house prices higher. As house prices increase and salaries stagnant, a large mortgage (debt) may be needed to purchase the home.
The three reasons mentioned above may explain why millennials are either deciding to rent longer, moving back home with their parents to pay off debt, lower their living expenses and save for future goals (like a down payment) and receiving more financial help from parents towards a down payment.
With stagnant incomes, rising cost of living and a rise in house prices (especially in Canada), more and more people are finding it difficult to save money. Millennials in particular face a unique challenge as they enter the working world with substantial student debt, minimal assets/equity and a rise in expenses.
As depressing as this may sound, I believe that there are opportunities to save money, even for many millennials that are starting their careers with a negative net worth (like myself). In part 2 of this post I will discuss some of these strategies.