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Gut-check: Economy vs Personal Finance in America June 13, 2006

Here’s a non-technical analysis on what’s going on now. According to this CNN/Money article, net household wealth hits record high, but debt rose at the fastest rate since 1986, the Federal Reserve said on Thursday. At the same time, America has a negative savings rate. So let’s summarize the household financial status this year,

Here’s the economic environment we’re in today:

From what I’ve seen out there, there are a lot of nervous economists out there…not to mention us people who are doing our best to support our families. Do the figures above say anything about Americans?

Source:
News Release: Personal Income and Outlays, Department of Commerce, Bureau of Economic Analysis (BEA), May 2006
Consumer Price Index Summary, April 2006

Economic Classes in the USA April 25, 2006

Our family grew up in what I think is an upper class neighborhood. I had friends whose family had huge homes, nice cars (Ferrari, Porsche, Benz), and parents who owned businesses or were executives. Our family was comfortable, but we didn’t own the 6000 sq. ft. mansions, sports cars. In other words, I believed that we were upper middle class family in an upper class neighborhood. Our discussion about class in America prompted me to think about what class I am in. Although I knew that the lower class didn’t have much net worth or did not hold management-type jobs, I never thought about what made a family middle class vs upper class.

According to wikipedia, the US has no legally-recognized social classes. Elites exist, but are numerous and there is no universally recognized hierarchy of people. Generally, sociologists use a five class model:

  1. Upper class
  2. Middle class: Upper-middle classs
  3. Middle class: Middle-middle classs
  4. Middle class: Lower-middle classs
  5. Lower class
  Upper class Upper-middle classs Middle-middle classs Lower-middle classs Lower classs
Proportion 1% to 3% of the U.S. population 10% or so of the U.S. population 40% or so of the U.S. population 30% or so of the U.S. population 20% of the U.S. population
Net worth
(not including home)		 above $500,000 between $250,000 and $500,000 between $125,000 and $250,000 $50,000 to $125,000 $0 to $50,000

There’s a lot of fuzzy borders between the classes, and there are no clear cut answers, but this gives us some idea of the classes in America. It’s said that the wealth of the top 1% in the United States equals the wealth of the lower 95%. I belive that the spreading wealth gap is causing a smaller proportion of middle class in American society. The reason may be downsizing in some industries of the American economy, competition from lower-paid foreign workers and contractors, and the systematic elimination of unionized labor.

There’s also a lot of discussion on Oprah’s message boards about class in America where there’s some interesting perspectives. Do you ever think about what class you’re in? Do you worry about the widening income gap between classes?

Source:
Wikipedia - Social structure of the United States
http://federalreserve.gov/pubs/bulletin/2006/financesurvey.pdf

Expect no Inheritance from Your Parents March 27, 2006

There was an interesting article from yesterday’s NY Times about the expectations of receiving an inheritance. According to the article, the majority of the US households (86%) do not expect to receive an inheritance. I’ve read that hundreds of billions of dollars are being passed on every year. However, most elderly Americans can probably forget about passing on an inheritance to their children.

After all, the evidence shows that baby boomers are going to need it: working Americans are unprepared for their own retirement, economists say. They have little savings of their own, and are facing the possible erosion of Social Security and the limits of company pensions…
In 2004 median inheritances — half were bigger and half were smaller — amounted to about $29,000 in today’s money, according to a Federal Reserve analysis of the Survey of Consumer Finances.

The two biggest reasons for the decreases in inheritance are healthcare costs and longer life expectancies. The poor and middle class will spend more and more on healthcare and retirement living, while the small percentage of wealthy families are getting a bigger slice of the inheritance pie. The wealth and inheritance $782,000 is concentrated in the top 2 percent of the richest.

It’s a good idea to live and spend as if you will not receive any inheritance. We shouldn’t have a sense of entitlement about getting things from our parents. Plus, we should feel lucky that our parents will live longer than previous generations. I’m not even sure my parents will have anything left to pass down, but we’re saving as much as we can into our 401k retirement plan since we don’t expect any inheritance. In fact, we should plan on taking care of our parents as they took care of us growing up.

Source:
NY Times: Inherit the Wind; There’s Little Else Left
By EDUARDO PORTER
Published: March 26, 2006

Average American Family Income Declines February 23, 2006

According to an AP story, the average income of American families, after adjusting for inflation, declined by 2.3 percent in 2004 compared to 2001.

The Federal Reserve reported Thursday that the drop in inflation-adjusted incomes left the average family income at $70,700 in 2004. The median, or point where half the families earned more and half less, did rise slightly in 2004 after adjusting for inflation to $43,200, up 1.6 percent from the 2001 level.

The median, or midpoint for net worth rose by 1.5 percent to $93,100 from 2001 to 2004. That growth was far below the 10.3 percent gain in median net worth from 1998 to 2001, a period when the stock market reached record highs before starting to decline in early 2000.

After technology stocks crashed in 2000 and in 2001, the 9/11 incident in NYC, it makes sense that the average income of American families declined. Although the economy in America is reported to be strong now, companies are cautious about their spending. As for net worth, I’m not sure if that includes the values of their homes or stock, but if so, a net worth increase of just 1.5% from 2001 to 2004 is pretty small. (The negative savings rate as reported earlier doesn’t include the value of the home or stock portfolio). With the inflation rate at around 2%, decline in family income, and net worth, it’s obvious we have to take steps to create a better spending plan and save for our future. The USA can’t count on our home equity as a source of money too long!

Source:
By MARTIN CRUTSINGER, AP Economics Writer