Our Weapon Is Our Wallet

Some recent consumer trends concern us. After a few years of fiscal responsibility that makes the Tea Party drool, consumers are ready to shop again. Our concern is not that consumers feel comfortable enough to shop, but that with stagnant wages, high unemployment and a lackluster economy, consumers are overextending themselves, again.

Readers of our blog know that we don’t have a lot of love for either Wall Street or Washington D.C. right now. We’ve argued for business to stop hoarding piles of cash, $947 billion of it offshore to avoid taxes. We’ve argued that Washington D.C., at best, has slowed America’s crawl out of the Great Recession.

Neither Wall Street nor Washington D.C. seems to have concern for consumers. Both are waiting for consumers, whom they incorrectly believe to be 70 percent of the economy, to spend like it’s 2007. If either has done anything, it’s been to urge consumers to spend again.

What frustrates us is that consumers are doing it! Either consumers don’t understand or don’t care that when they voluntarily buy products and services that have inflated in cost, especially when they pay more than they can afford, they put even more inflationary pressure on those products and services.

Below are four major examples.

Overextended on Cars

AAA recently reported that the average American worker spends $760 a month, or $9,120 annually, on car expenses. This includes standard maintenance, gas, tires, insurance, finance charges, depreciation and license and registration fees. To cover those same expenses for an SUV, the average American worker spends $967 a month, or $11,604 annually. These figures are per vehicle. Multiply them by two, as most households have at least two cars and/or SUVs.

Just last year, as wages remained stagnant, the average car increased by $1,536. The average new car is estimated to be unaffordable for the average American family in 24 out of the 25 largest U.S. metro areas.

No need to fear, though. Corporate America and the government rely on the consumer to spur the economy and consumers oblige. Either because of pent up desires, needs or both, consumers are taking out 72-month and 96-month auto loans in order to buy the cars they really can’t afford.

According to Experian Automotive, the number of auto-loans taken out for between 73 and 84 months in the fourth quarter of 2012 increased 19.4 percent. According to J.D. Power and Associates, a record 32 percent of auto-loans taken out between March 2013 and March 2014 were for 72-months, up 30 percent from the prior year.

Consumers’ willingness to overextend themselves on auto-loans that they reasonably cannot afford only tells auto makers and auto-lenders that they can continue to increase prices and extend terms. Consumers aren’t concerned with a perpetual life of indentured servitude.

Overextended on College

The average growth rate for college tuition has been about 8% per year for the last decade, while median incomes increased about 1.9 percent annually over the same period.  The 2013-2014-academic-year saw a drop in college tuition to 2.9 percent, but that is still 1 percent more than incomes increased.

As of 2013, the average cost to send a student to a four-year in-state college was about $121,000.  Unless a parent invested $2,784 annually at birth through graduation at age 22 per child and got an annual return of 6 percent their child doesn’t have enough money to afford college. We don’t know many new parents that have an extra $232 a month.

To ask a college student to work their way through school is no longer reasonable. The Atlantic recently reported that it’s impossible for a college student today to work their way through school, as was done in our Norman Rockwell past. A Reddit user quantified the rising cost of tuition at Michigan State University (MSU) by cost per credit hour. The Reddit user said, “A credit hour in 1979 at MSU was $24.50, adjusted for inflation that is $79.23 in today’s dollars. One credit hour today costs $428.75.”

The article goes on to say that with the $2.90 minimum wage of 1979, it would’ve taken a student 8.44 hours, or basically one working day, to earn enough for one credit hour. A student with 15 credit hours per semester could’ve paid for all 15 credit hours with three weeks of full-time work or six weeks of part-time work.

With today’s minimum wage at $7.25, it would take 59 hours to pay off a single credit hour that costs $428.75. That is the equivalent of 22 weeks (five months) of full-time work or 44 weeks (11 months) of part-time work.

Because consumers are so agreeable to spend their money on college indiscriminate of cost, student loan debt from 2011 to 2012 increased 10.5 percent from $26,600 to $29,400 even though 260,000 graduates can’t find a job that pays better than minimum wage. Colleges know this and this is why they aren’t afraid to increase tuition four times the increase in wages.

Overextended on Homes

According to the Joint Center for Housing Studies of Harvard University, in 2011, 18 percent or 20.6 million households were “severely burdened”. This means they spent 50 percent or more of their pre-tax income to buy a house.

We don’t like the term “severely burdened households” because it insinuates these home buyers purchased their home through no fault of their own. We prefer to call them unconscious consumers.

Since the beginning of the recession, the number of these unconscious consumers increased 2.6 million. Even after the record number of foreclosed homes, 20.6 million unconscious consumers still bought homes at least 20 percent more than the maximum they should’ve spent.

Consumers aren’t done with their over-priced and over-sized houses and the housing industry knows this. While it’s true that investors were a major player in increasing home prices over the last two years, more increased demand only increases prices. Consumers aren’t helping themselves.

Overextended on Credit Cards

After a few years being as cheap as Jack Benny, consumers paid off significant credit card and other debts. That’s changed as consumers are back with their plastic. The average U.S. household has $15,252 in credit card debt, totaling $856.5 billion for all households combined.

With the best post-introductory credit card interest rate at 10 percent, it will take almost 12 years of minimum payments and $3,962 in interest payments to pay off the average household’s credit card balance. That’s $3,962 that won’t go towards investments, tuition or retirement. That won’t even be used to buy something tangible. That’s just the cost consumers will to pay to buy something today that they can’t afford.

A Revolution with Our Wallets

Consumers’ willingness to take on more debt and overextend themselves more simply permits businesses to increase the prices of their products and service more, regardless that consumers cannot afford it. Consumers will take out larger and longer term loans and this makes business and banks more profitable and puts consumers more in debt.

We, the consumers, have the power to force prices to drop. Our weapon is our wallet. If we don’t open our wallets to buy products and services that have increased beyond reason, we can force businesses and sellers to drop prices. It’s supply and demand. If we continue to overextend ourselves, we give business permission to increase prices even when our wage, employment and economy don’t support it.

Join the revolution. Shut your wallet.

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