10 Things You Didn't Know About US Household Income Allocation
From Nick Colas of ConvergEx
Four decades ago no one had cell phones, the Internet, or personal computers; households had landlines, only offices or research centers had any kind of computer, and wireless anything wasn’t even close on the horizon. These days, of course, there is more than 1 cell phone per person in the US, laptops are standard fare, and using dial-up or wired Ethernet is like living in the Stone Age. But each of these technological advances comes with a cost; and, more specifically, a cost a family in the 1970s didn’t have to cover. The price of a cell phone plan and wireless internet is well over $1,000 per year; more if you add in the price of a $1,500 laptop or a $200 smartphone, which most of us tend to replace after a few years of wear and tear.
With average post-tax income of $63,000, according to the latest Consumer Expenditure Survey, these bills might not seem like a lot to shell out – only about 4% of post-tax wages – but they’re costs that the families of 1973 avoided completely. How have the households of the 21st century managed to incorporate these added expenses?
Surprisingly, though, the average household in 2012 spent a bit less of its post-tax income than its counterpart from 1973: 81.2% versus 85%. Part of this is simply a matter of size: there were 2.5 people per household in 2012 and 2.9 in 1973. But regardless of family size, the way we spend on just about everything has changed – and not just because we pay for multiple smartphone plans and satellite TV. As prices (read: inflation) and necessities have evolved, so has the mode of income allocation among American families.
Read on for our list of “10 Thing You Didn’t Know About US Household Income Allocation”, derived from the self-reported CES data from the BLS:
- We may be fatter that we were in 1973, but we’re doing it on the cheap. Only 12.8% of the average household’s expenditures is spent on food (both at and away from home), versus 19.3% in 1973. As we mentioned, a decline in food expenditures makes sense as household size has decreased. But if we assume that each member of the household ate an equal percentage of the food purchased, that would mean that in 1973 each person “consumed” 6.7% of expenditures via food; in 2012, the same calculation yields 5.1% per person. So we’ve managed to save a bit on the food front – which is surprising given that food inflation has largely kept pace with overall CPI.
The decrease makes a bit more sense when we look at where we tend to spend our money on food. While we spend about as much on eating out as a 1973 household, we spend significantly less on meat, dairy, and bakery products. Instead, we put more money into fruits and vegetables, sugars, and “miscellaneous foods” – all of which have a lower inflation rate (and are generally cheaper) than the popular 1970s foods.
- Home is where the heart – and the money – is. In 1973 30.8% of post-tax income went to housing, compared to 32.8% in 2012. Shelter – owned and rented dwellings – increased the most, going from 15.9% of expenditures in 1973 to 19.2% in 2012. The bump in the housing market definitely plays a part here in terms of higher home prices, but so does the fact that the average home size in 2012 was nearly double what it was in 1970: 2,700 versus 1,400 square feet. Our spending on “other lodging” – vacation homes, timeshares, etc. – is also more than four times what it was in 1973: 1.3% against 0.3%.
- And we’re cost-efficient housekeepers at that. “Household operations” and “housekeeping supplies” have declined from 3.2% and 1.6% in 1973 to 2.3% and 1.2% in 2012. Laundry, textiles, and furniture all account for about half the amount of expenditures as they used to. My personal favorite here is “floor coverings”: these accounted for 0.5% of expenses in 1973 and 0% in 2012, which I like to think represents the death of the shag carpet. Taking a look at CPI, this significant drop in spending on household furnishings and operations makes sense: inflation in this category is up exactly half as much as overall CPI, just 124%.
- We’re always plugged in – 24/7, at $0.16/hour. That is, utility costs are higher – mostly due to more spending on electricity. We don’t have to spend as much on natural gas (0.7% vs. 1.1%) or fuel oil (0.3% vs. 0.7%), but our plugged-in lifestyle is pushing electricity expenses up to 2.7% of expenditures as of 2012 compared to just 1.9% in 1973. And according to the CPI, electricity inflation is slightly less than overall price growth; if it had kept pace over the years since 1973, we’d probably be allocating much more to this expenditure category. That said, we pay much less for TVs, DVD players, and any other “entertainment” equipment.
- When it comes to spending on phones, though, we’re almost completely unplugged. Surprisingly, despite more than 1 cell phone per person in the US, telephone services cost about the same as they used to. A 2012 household spends 2.4% of all expenditures on phone services, while the 1973 family spent 2.2%. The evenness here is likely a combination of two factors. First, more and more families are dropping landline service altogether, thus cutting costs of overall telephone services. In fact, the CTIA Wireless Association estimates that 35.8% of households were “wireless-only” at the end of 2012. Secondly, cell phone service providers have bumped up prices over the years, likely to keep revenues even as they lose more and more landline users. In the end, these costs seem to balance out; hence the lack of change in income allocation here.
- There’s more pain at the pump now than there was in 1973 – and that despite record high oil prices that year. Transportation overall doesn’t take up quite as large a chunk of income, but we’re spending more on gas and public transportation. Overall, the transportation category accounts for 17.5% of expenditures in 2012 compared to 19.3% in 1973: vehicle purchases and expenses are down from 9.5% to 6.6%, but gasoline and motor oil has risen from 4.2% (during an oil crisis!) to 5.4%. We’ve actually cut back on motor fuel expenses recently, though, and for good reason: prices are up 310% over the last 30 years. That probably contributes to our higher expenditure on public transportation, too; 1.1% of expenses go there now versus 0.8% in 1973.
- Healthcare shmealthcare. A bit of a surprise here: healthcare actually didn’t take up too much more of expenses in 2012 than it did in 1973. Consumers reported spending 6.9% of their income on healthcare in 2012 versus 6.4% 40 years prior; in fact, medical services as a category went from 3.4% to 1.6% over those four decades. But the costs of health insurance and drugs (prescription and non-prescription) as a percentage of expenses almost doubled, from 3.1% to 5.3%. Again, it’s important to remember here that since household size has decreased, expenditures per person are actually higher now; still, given the recent focus on healthcare costs, it’s a bit surprising that we report spending about the same as families from 1973.
- We’re behaving ourselves a bit more financially when it comes to indulgences. According to the CES we don’t spend quite as much on ourselves or our “vices” as we did in 1973. Personal care products and services, apparel, alcoholic beverages, and tobacco all take up a substantially lower portion of expenses nowadays: altogether they used to take up 12% of expenditures, versus just 6.1% now. A lower smoking rate explains the tobacco, but we can’t say for sure why we’ve allocated so much less to ourselves over the past 40 years. My best guess, though, is that we’ve re-allocated to spending on our pets and hobbies: they took up 1.3% of expenses in 2012 and just 0.9% in 1973. Shag carpets out, dog Halloween costumes in.
- …But also more frugal when it comes to others. Sadly, we are not as generous as we used to be. 6.1% of spending was on “cash contributions” to churches, non-profits, etc. in 1973, but in 2012 it was only 3.7%. But we are giving more to others, if unwillingly: expenditures on pensions and social security are up to 10.2% from 5.8%.
- Diversification is not the name of the game when it comes to sources of income. The first batch of consumers from 1973 reported that 7.7% of income came from self-employment: only 4.4% of 2012 respondents said the same. Likewise, 4.7% of 1973er’s income came from “interest, dividends, rental, or other property income”; we only collected 2.1% that way. Finally, “other” income accounted for only 0.3% of 2012 consumer income, while it was 2.6% in 1973.
As we mentioned, households in the 21st century are spending less of their income overall compared to families from the 1970s: 81% versus 85%. It’s a bit of a mystery, then, why we aren’t managing to save more: families in 1973 reported a personal savings rate of 13%, while ours is just 4.6%. Where are we putting the extra money? Not into retirement accounts, stocks, or bonds, clearly. Paying off debt? Possibly. Whatever the case, it’s clear the consumer is changing the way he/she spends: dedicating more to our homes and our lifestyles (fancy phones, entertainment, pets…) and forgoing more savings and investments. The 1973 households surveyed are still more or less in decent financial standing today; we’ll see how it works out for those of 2012.
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