KEEPING UP WITH JONESES 1
KEEPING UP WITH THE JONESES: AMERICANS LIVING BEYOND THEIR MEANS
Benjamin W. Kratz
Columbia, SC 29229
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This paper shows that the debt burden of households is due to how and why they are spending. They are
easily influenced by those around them, the availability of credit, and the call of sellers. American
consumers are more worried about what they look like and are aided in over spending from financial
institutes making credit so easy to obtain. There are three simple techniques to change their habits and
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From the outside, it looks like Linda has the perfect life. She's a stay-at-home mother of three
children, lives in a big house in the suburbs, drives a new car and wears expensive clothes. She may look
like a million bucks, but behind closed doors, it's an entirely different story.
Like millions of Americans, Linda and her husband, John, are heading toward financial catastrophe
by living a life they cannot afford. Although John brings home $4,000 or $5,000 a month, their expenses
are almost three times those amounts per month. Linda says she starts each day at a popular coffee chain,
which adds up to $300–$400 a month. Because her own six credit cards are maxed out, Linda secretly
uses her husband's credit card to get cash advances.
Linda spends nearly $70 a week on personal things like tanning and manicures. She even admits to
spending about $3000 within the last year on just hair extension. She doesn’t just stop at personal items;
Linda says she's spent around $2,000 to $5,000 on silk flowers and commissioned murals for almost
every room of her house. Linda also shops regularly—online and in stores. Sometimes she will buy
something even if she really doesn't like it or need it; she just feels that she has to buy something.
Linda, like the majority of Americans, is living beyond her means. Why?
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WHAT PERSONAL FINANCIAL CATEGORIES IS THIS HAPPENING
We can see the consumer spending habits by looking at how they choose to purchase a good or
service. For this paper I have looked at four categories to show where and how consumers are spending.
Credit versus Cash
Cash use in the United States is declining based on a 2005-2006 Study of Consumer Payment
Preferences - a nationwide consumer payment-preferences study conducted by the American Bankers
Association (ABA) and Boston-based Dove Consulting, a division of Hitachi Consulting. The ABA
collected data from 3,008 completed surveys collected throughout a national paper and Web survey sent
to U.S. consumers. The data showed that cash was used for 33 percent of consumers’ in-store transaction
since 2001 and 40 percent used credit cards. This noted decrease in the use of cash was noted as being
due to the ease of payment method.
In addition, American consumers have begun to view ―credit‖ as a viable substitute for ―cash‖.
They also see ―Credit‖ as a good thing, in that it allows the household financial flexibility in meeting its
consumption needs1. People seem to be using their credit cards to make everyday purchases like
groceries. They see their credit limit as viable spending cash and not as debt. Although it might seem
benign, these items help build debt.
Michael Hodges sites in his ―America’s Total Debt Report‖ that about 51 million households carry
credit-card debt at an average balance of nearly $12,000. He also states that according to the Cambridge
Consumer Credit Index in March 2004 only 42% of Americans are paying minimum to zero payment on
their credit card balances. Hodges states that in 2003, the average credit-card debt of US households with
at least one card was $9,205, up from $2,966 in 1990 - - that's 310% higher.
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It is apparent that the American consumer has resorted to using more credit than cash. Some
studies have shown that the habit begins in college where the credit cards have established a hold on
providing the needed funds to pay for college necessities. College students are stretched for funds and the
credit companies prey on them by providing them with a line of credit with low minimal monthly
payments. To add they even give low interest rates for students with a high GPA.
Mortgages versus Rental
In the past it was common for high School Graduates and low income families to look at renting a
home instead of buying one. Some of the reasons to rent were based on the level of income, cost of
renting versus mortgage payments, cost of local taxes, location, and size of living space available. For
renters, homeownership is a dream to have and one of the primary ways to build wealth. It takes years to
obtain their goal and a good amount of fair credit practice.
With the introduction of ―Subprime Loan‖ the dream of owning a home was expanded to borrowers
who, for a variety of reasons, would otherwise be denied credit. Potential borrowers that would have
failed credit history requirements in the standard (prime) mortgage market were now able to apply for a
home in the subprime market. No longer was the borrower’s cost driven primary by the down payment
alone. Instead the borrower’s cost was now driven by credit history and down payment requirements.
Renters were not the only group enticed by the sub-prime market, current home owners were enticed
by the ability to take out a home equity loan. The Home Mortgage Disclosure Act (HMDA) data for
1999 indicated that 76% of the lending by institutions identifying themselves as primarily subprime
lenders was home equity lending. The sub-prime market allowed homeowners to dig into their equity in
order to compensate their stagnant incomes which would have not been allowed with the prime mortgage
market. Of the total number of subprime loans originated, just over half of the subprime loans originated
were for cash-out refinancing, where as more than one-third were for a home purchase (see Figure 1).
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This trend of borrowing on household equity is clearly outline in figure 2 where owner’s equity fell to a
postwar low ending at 47.9% in 2007.
New versus Used
Many consumers frown on the idea of buying something that is used. They want the newest and
greatest thing the market can provide and they want it now. They disregard the cost factor associated
with buying the newer item instead of taking the old version. We can see this clearly in the automobile
Buying a new car is a fun experience. Many people like the smell of a new car and the idea of
driving around the newest and greatest ride available. Most of us love the idea that a new car has a
guarantee that nothing is broken on it and that is has wonderful nifty features that the old car does not
have. Many look at the old car as a potential repair cost nightmare.
The problem with buying a new car is that once you buy it and drive it off the lot it is almost
instantly worth less than you paid for it. According to an article by Credit.com, ―A new car drops in
value dramatically as soon as you drive it off the dealer’s lot. After five years, your new car may lose
70% of its value.‖ This does not happen when you buy a used car and the depreciation is about $3,000-
7,000 in comparison.
Using the Kelley Blue book to compare a new 2008 versus 2007 Ford Mustang 2-door deluxe
Convertible allows us to see the cost factor of buying new versus old (Table 1). By driving the new car
off the lot for 1 mile you lost almost $400 in value and it grows to almost $1,500 after driving 10,000
miles. However if you chose to buy the old car and drive it off the lot you do not instantly lose value and
after driving 10,000 miles you lost only $150. Buying the used 2007 version turns into an initial savings
of $2,392 which after a year of driving becomes to $2,542.
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Lease versus Loan
Consumers with the urge to constantly buy a new car see leasing as a viable option instead of taking
out a loan. The leasing process allows the consumer to ―rent‖ a new car for two to five years. When
consumers buy using a loan they pay for the entire cost of a vehicle where with a lease the consumer
works out an agreement based on a portion of the vehicle’s cost. Most agreements state that the consumer
agrees to pay a certain amount monthly, maintain insurance, mileage use cost, and maintain the condition
of the vehicle until the end of the lease term. Once the term is over the consumer turns the car in and pays
extra for any damage done to the vehicle along with any excess mileage use. They also have the option to
buy the car or trade it for a new car.
The lease is more enticing since you pay less upfront for the vehicle and are only paying for the
amount of depreciation the finance company expects the car will receive from use. So if we lease a
$20,000 car with an estimate resale value of $13,000 after 24 months, you would pay for the $7,000
depreciation value up front plus finance charges and fees. Customers that buy the vehicle finance the
$20,000 car value plus finance charge. When you compare the rates you would pay for buying the
$20,000 car outright it is evident that leasing is more affordable to the consumer in the short term.
However the long term benefit is reversed since you pay more over time for the lease if you decide to
keep the vehicle because during the lease term you do not build any equity. It is the short term benefit
that drives consumers to fall into the lease new trap since it is almost %50 less to lease a vehicle than it is
to own as long as you continue turn in the vehicle for a newer version.
INFLUENCING FACTORS FOR HOUSEHOLD DEBT
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Consumers do not naturally spend money, it take some type of outside influence that gives them a
sense that they need a good or service. Some of the factors that influence the consumer to spend are
social norms, culture, advertising, and current trend.
Social norms are customary rules of behavior that coordinate our interactions with others. They
coordinate expectations and thereby reduce transaction costs in interactions that posses multiple equilibria
(Wärneryd, 1994). A good example of a social norm is to have two kids play a game where they divide a
pile of chips in any way they like, but if they fail to agree on a division within a specified period of time
they forfeit all of them. All the chips can be cashed in for the same amount of money; the norm is to
divide the chips up evenly.
Americans are under the mindset that what they acquire and own is reflective of their personal
identity. The type of car they drive, the designer clothes they wear, the home they live in, and the
restaurants they choose to eat at. All of this assists in supporting the mental image they have of
themselves and that of the ―Jonses‖. They believe that is what people see from the outside that makes
them wealthy and to get that requires money.
A current economic social norm that aids in the customer to obtain the visual image described is ―to
buy now and pay later.‖ Many consumers see that they do not have the liquid asset to spend on the brand
named designer jeans; however, when they can put off the actual payment they jump at the opportunity to
buy. Many consumers use credit as a function of income spending to obtain goods and services they want
but did not have the disposable income to buy. Majority of businesses have accepted the social norm and
provide the consumer the option to buy on some type of credit plan where the consumer pays a monthly
minimum so that they can enjoy the goods of services they want at that moment in time.
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The American culture is formed around consumption and not production. We will more likely pay
someone to do something for us if it frees up our time to do something else. If it costs less to have
something made in China we will do so. We have become knowledge and service based workforce where
technology controls our impulse to buy. No longer do we take the time to produce something, we want to
have it done for us as a small cost to us and if it requires going to another country then we will do so.
Juliet Schor states in her book ―The Overspent American‖ that consumption have a
competitive character. In The Wealth of Nations, Adam Smith observed that even a "creditable
day-laborer would be ashamed to appear in public without a linen shirt" and that leather shoes
had become a "necessary of life" in eighteenth-century England. The most influential work on
the subject, however, has been Thorstein Veblen's Theory of the Leisure Class. Veblen argued
that in affluent societies, spending becomes the vehicle through which people establish social
position. The conspicuous display of wealth and leisure is the marker that reveals a man's
income to the outside world. (Wives, by the way, were seen by Veblen as largely ornamental,
useful to display a man's finest purchases--clothes, furs, and jewels.) The rich spent
conspicuously as a kind of personal advertisement, to secure a place in the social hierarchy.
Everyone below stood watching and, to the extent possible, emulating those one notch higher.
Consumption was a trickle-down process. (Chapter 1)
The Key thing Schor looked at is how the consumer bought on impulse based on their vision on
needing what the rich had to bring their economic standing up to their idol’s level. This is what drives the
American consumer’s purchases and shapes our culture.
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Advertising (banks, creditors)
Banks and creditors have made it easier for consumers to obtain a credit line and have found
ways to make the goods and services more enticing to buy. To gain broader distribution for the plethora
of new products, manufacturers have gone to lifestyle marketing, targeting their pitches of upscale
items at rich and nonrich alike. Gourmet cereal, a luxurious latte, or bathroom fixtures that make a
statement, the right statement, are offered to people almost everywhere on the economic spectrum. In
fact, through the magic of plastic, anyone can buy designer anything, at the trendiest retail shop, or at
outlet prices. That's the new consumerism. And its siren call is hard to resist.
What makes things worse is the marketing process has continued to increase the standards of
living that consumers are supposed to attain to reach “the good life” status. Take for instance buying a
house that was built in the 70s, the wall paper is not up to the current trend and the kitchen appliances
are way outdated. You will feel the urge to update your interior simply because of the standard that has
now been established by the advertisements from Lowes and Home Depot. Another thing to look at is
vacationing. If you have not been on a family vacation and you would like to include your extended
family on your vacation because you have not seen them for a while, then go to Disney because they
have special family reunion packages that start at a low affordable price. To add, if you cannot afford it
then you can apply for a Disney master card and receive cash rewards that you can exchange for special
Disney products or services. And so on. In addition there is a proliferation of new products (computers,
cell phones, faxes, and other microelectronics), there is a continual upgrade going on of your old
products along with a shift to customized, more expensive versions, all part of the ongoing list of have to
have items to be considered having some lever of wealth. What we want slowly grows into what we
need and the suppliers know this and find ways to make us really believe that our wants are really a
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Burger King Generation
This is best described by Burger Kings sales pitch of ―Have it your way‖. The Burger King
Generation truly believes that they are in control of the market and can dictate what is to be produced
and consumed. They want the newest gadget or gizmo available on the market and want to have the
ability to purchase it their way. If the good or service is not easily attainable it will not sell. If the
consumer is not able to afford it they will seek out the means by which to procure it.
WHAT CAN WE DO ABOUT IT
Americans’ cannot continue to use credit as a means to keep up. We need to learn some
restraint on our urges. Once the consumer gains control over their spending habits they will
realize that they are able to build the wealth they truly want without build debt. I suggest three
solutions we can do that will allow us to take control. Consumers need to stop overconsumption
of unnecessary goods and services; change negative spending behavior patterns; and increase
positive saving and investment behavior.
Stop overconsumption of unnecessary goods and services
Consumers need to learn to look hard at their impulsive buying habits. With limited disposable
incomes, they need to take a moment and really look at what they want to buy and ask if they truly need
it. To do this they should ask the following questions:
How will I use it?
When will I use it?
Why am I buying it?
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And is the price reasonable?
If you can provide sensible positive answers to these questions you are most likely making a good
buy. On the other hand if you are buying it to impress those around you with no legitament reason, then
you are not making a good impulse purchase.
There are also practical strategies for avoiding impulse spending. Here are five key tips from the
suggested list produced by Susan Carney in her article, ―Teens and impulse spending‖ that can apply to
1. If you find something you really want, put it on layaway or write the item down. Check back
in a week or two to see if you still want it, or if the desire has passed which often does.
2. Throw away circulars and advertisements before reading them. You may see something you
like, head for the store, and wind up buying a bunch of things you don’t need.
3. Make a list before you go shopping, and stick to it.
4. When shopping with a friend, avoid the temptation to match their purchases. Instead, tell
yourself you really don’t need it, and that the urge to have it will pass.
5. Don’t hesitate to return something if you don’t use it within a few weeks, or if you change
your mind once you get home. Don’t let your closet become a home for a bunch of unworn
clothing with the tags still on them.
The end goal is to limit your excess expenditure on items you really do not need and to give you a
better handle on spending on things that are a necessity.
Change negative spending behavior patterns
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The key to changing negative spending habits is first to identify them. Are you too impetuous? Do
you keep borrowing too much money and getting into too much debt? Have you no savings or
investments to cushion the fall? Do you waste your money on too many extravagant purchases that you
don't need? Managing this stage is about building strong foundations. The key thing to do is to
economize at the right time and spend at the appropriate time is the key to wealth management and
Economizing is not living frugally. It is not about being miserly and not sharing your money. It is
not about penny pinching and living without the things you really need. Economizing is simply about not
wasting your money, not being extravagant and not buying things you cannot. You will have to create a
budget that forces you to live within your means.
Consumers might have to simply decide to look at the lesser known brand or the used version as a
means to economize. Yes, it is not the newest thing on the block but what is more important; to be well
known for having the newest gadget, or to be known as a wise consumer who knows how to be thrifty
like the wealthy do?
Increase positive saving and investment behavior
The percent of income saved by Americans dipped into negative territory in 2005 and it remains
there today. Simply put, Americans spend more than they earn, financing their spending by exhausting
their savings funds and increasing their credit obligations. A solution to this is to slowly increase your
savings to 10% of your disposable income. At first, 10% may be too much and you might have to begin
small like 1% or $25 per pay. This might be small but it will soon become a large amount.
This method works well if you receive raises that are a percentage of your current pay. For
example if you are to receive a 3% pay increase choose to take 1% of your current pay and put it away in
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savings. That way you will not notice a difference in your income and will actually feel good since you
still are receiving an actual increase in disposable income that you can still spend.
There are other programs that banks have that will assist you in saving money. One of the
programs is to round up your expenditures to the nearest dollar and take the excess change and place it
into a savings account. This plan has a twofold benefit. The first benefit is that you will have fewer
issues with calculating your finances. You will not have to worry about the cents. The second benefit is
that you will not realize you are saving while you are spending.
By controlling your spending habits and using this method of rounding up the purchase price of
expenditures, consumers will begin to see their nest egg slowly grow and be able to pay for their items
outright without placing them on credit.
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At market Place (2006). ―Study: Cash use declines to card use in U.S.‖ Retrieved July 15, 2008 from:
Carney, Susan (2008). Teens and impulse Spending. July 10, 2008, retrieved from
Chomsigengphet, Souphala and Pennington-Cross, Anthony. (2006), ―The Evolution of the Subprime
Mortgage Market.‖ Federal Reserve Bank of St. Louis Review Jan/Feb2006 Report: 31-56.
Debelle, Guy. (2004). ―Macroeconomic Implications of Rising Household Debt.‖ BIS Working Paper
No. 153 (June).
Eisinger, Jesse. (2006). ―Night of the living debt.‖ Wall Street Journal (January 4): C1.
Hodges, Michael. (2008). ―America’s Total Debt Report‖ Retrieved July 12, 2008, from
Kwan, Simon. 2001. ―Rising Junk Bond Yields: Liquidity or Credit Concerns?‖ FRBSF Economic Letter
2001–33 (November 16). http://www.frbsf.org/publications/economics/letter/2001/el2001-33.html.
Lease Vs Buy (2008). Retrieved July 15, 2008 from http://www.leaseguide.com/lease03.htm
New vs. Used. (2008). Retrieved July 15, 2008 from http://www.credit.com/life_stages/buying_car/New-
Schor Juliet B. (2004). ―The Overspent American: Upscaling, Downshifting, and the New Consumer.‖
Retrieved July 19, 2008 from: http://www.nytimes.com/books/first/s/schor-overspent.html?_r=1
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Wärneryd, Karl. 1994. Transaction cost, institutions, and evolution. Journal of Economic Behavior and
Organization 25, 219-239.
Weinberg, John A. (2005). ―Borrowing by U.S. Households.‖ Federal Reserve Bank of Richmond
(2005) Annual Report 2005: 4-16.
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Weinberg (2005) also talks about how they see debt as a bad thing since it represents a lack of
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Kelley Blue Book Comparison for Ford Mustang 2-door deluxe Convertible
Year Condition Mileage Retail value
2008 New 0 $23,392
Used 1 $23,005
Used 10,000 $21,930
2007 Used 1 $21,000
Used 2 $21,000
Used 10,000 $20,850
Note. Data retained from http://www.kbb.com/KBB/Default.aspx
Lease vs. Loan
Lease- 6% Loan - 0% Loan - 6%
Car Price $23000 $23000 $23000
Down Payment $1000 $1000 $1000
Interest Rate 6% 0% 6%
Residual $11000 n/a n/a
Months 36 36 36
Payment $388.06 $611.11 $669.28
Note: Typical lease compared to a 6% loan and a 0% loan. Data retained from
Figure 1. Number of Loans Originated by Purpose
Source: Loan Performance ABS securities data base of subprime loans.
Figure2. Owner Equity % Household Value
Source: Family Economic Report http://mwhodges.home.att.net/