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KEEPING UP WITH THE JONESES: AMERICANS LIVING BEYOND THEIR MEANS

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					                                              KEEPING UP WITH JONESES   1




KEEPING UP WITH THE JONESES: AMERICANS LIVING BEYOND THEIR MEANS


                                By


                         Benjamin W. Kratz

                              Student

                         Webster University

                        Columbia, SC 29229


                     e-mail: ben@kratzpages.com
                                                                    KEEPING UP WITH JONESES                2

                                                  Abstract


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

begin saving…
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INTRODUCTION:


      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

industry.


      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


      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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Culture


      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

need.
                                                                      KEEPING UP WITH JONESES                11


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

any consumer.


        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
                                                                   KEEPING UP WITH JONESES                   13

      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

success.


      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
                                                                   KEEPING UP WITH JONESES                14

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.
                                                                 KEEPING UP WITH JONESES               15

References


At market Place (2006). ―Study: Cash use declines to card use in U.S.‖ Retrieved July 15, 2008 from:

      http://www.atmmarketplace.com/article.php?id=6832


Carney, Susan (2008). Teens and impulse Spending. July 10, 2008, retrieved from

      http://youthdevelopment.suite101.com/article.cfm/teens_and_impulse_spending


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

      http://mwhodges.home.att.net/nat-debt/debt-nat-a.htm


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-

      vs-Used.jsp


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
                                                                KEEPING UP WITH JONESES                  16

 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.




.
                                                                 KEEPING UP WITH JONESES                 17

                                                Footnotes

      1
       Weinberg (2005) also talks about how they see debt as a bad thing since it represents a lack of

discipline.
                                                                   KEEPING UP WITH JONESES     18

Table 1


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


Table 2


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
http://www.leaseguide.com/lease03.htm
Figure 1. Number of Loans Originated by Purpose




                                         Year
     Source: Loan Performance ABS securities data base of subprime loans.


Figure2. Owner Equity % Household Value




Source: Family Economic Report http://mwhodges.home.att.net/

				
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Description: Abstract 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 begin saving…