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Seven Charts to Challenge the Popular Middle Class Money Narrative

The concentration of wealth is a societal problem that society as a whole cannot afford to ignore, and it is not getting better. It recently emerged that the eight richest persons in the world possess as much wealth as the poorest half of the world’s population. Eight men hold as much of the world’s resources as 3.6 billion people.

Unfortunately, traditional media tend to conflate this increase of wealth among the very few at the very top with the demise of the western world’s middle class. The middle class, as the consumer, and product, of traditional media, generally tend to accept such tales of their demise. Doomsday prophecies, particularly those that affect your very own readership, are simply good business.

Here, I will present seven charts based on income, savings and consumption data from the United States over the past thirty years. My hope is that these charts will make you think twice before unconditionally accepting the narrative that the richest few are stealing the wealth of the majority, the middle class. Or at the very least, show you that you have a choice in whether or not you want to give your money to those at the very top.

Americans Save Less Money Than Before

Chart displaying average saving as a percentage of income from 1984 to 2015
Data source: Bureau of Economic Analysis

The average rate of saving as a percentage of income in the United States has dropped from around 11% in 1984 to around 6% in 2015, after bottoming out at less than 3% in 2005. Surely this should be used as an argument for a grand scale deprivation of the middle class, as declining saving rates can only be a result of decreasing real wages for the general population?

Chart showing US Real Median Income from 1984 to 2015
Data source: United States Census Bureau

Average income, as measured by the median, adjusted for inflation dropped since peaking at around $58,000 in 1999. The trend has however reversed in recent years, and for the period measured, from 1984 to 2015, it has increased by around 16%. The average American is, in other words, earning more and saving less.

Servicing Loans Is Not The Problem

One reason often cited for the reduction in saving rates is the increase in housing prices, supposedly far outpacing real wage growth (it is, in some areas, but not by much for the whole country on average) resulting in higher mortgage payments that in turn reduce the average American’s ability to save.

Mortgage debt service as a percentage of average income
Data source: The Federal Reserve Board

That claim does not have a base in reality. As the chart above shows, the average mortgage debt service payments as a percentage of disposable personal income were lower in 2015 than it was in 1984. Unsurprisingly, it did peak at just above 7% in 2006, but the trend for the whole period is more or less flat.

If mortgage payments aren’t to blame for the reduced rates of saving, then surely the increase in student debt and the cost of servicing those debts are the reason? At least, that what you would believe if you drew your conclusions from looking at headlines. The actual numbers, however, tell a different story.

Consumer debt service as a percentage of household income
Data source: The Federal Reserve Board

The trend for consumer debt service payments, which includes student loans, as a percentage of disposable income, is near identical to the one we saw for mortgages. In fact, over the observed thirty year period, the rate has indeed decreased.

The Real Reason Why Americans Save Less

I promised you seven charts. From the first five, we have established that average real income has increased over the past thirty years. We have seen the decrease of average saving rates, but the cost of servicing debt does not offer an explanation. The final two charts make it abundantly clear what is the actual cause behind the average American’s reduced rates of saving is.

Personal Consumption as a Percentage of Income
Data source: Bureau of Economic Analysis

Increased personal consumption is the reason why the average American saves less money than they did 30 years back. And before you jump in with “well, of course, that is because everything is much more expensive than it was back then” remember that we saw above that the average person has more money to spend today than back then. In real terms, after inflation. Logically, the conclusion that follows is that the average American is consuming more than they did 30 years back.

Chart showing Real Median Income development vs Personal Consumption
Data source: Bureau of Economic Analysis

I want you to study the above chart carefully, and observe and take in the point it conveys. It shows two graphs we’ve seen before plotted against each other: The development of the real median wage against the ratio of consumption as a percentage of income, and the trend of these two graphs are nearly identical over the observed period.

What this means is that every increase in real income is being spent entirely on consumption, thus increasing consumption ratio. While saving some of that extra income might sound like a good idea, in principle, the data shows that the average American ends up spending it on personal consumption instead. Thus, the average rate of saving decreases.

Chart comparing Saving Rates vs Personal Consumption Rates
Data source: Bureau of Economic Analysis

Our seventh and final chart shows that the saving rate and the personal consumption rate are near perfectly inversely correlated. And, as we saw above, consumption increases with increases real wages. If the middle class is being robbed, it is of their own accord. Or rather, they are, consciously or subconsciously, willingly spending their increased purchasing power.

Are you looking for a different way? Start with reading How I Learned to Stop Worrying and Love Saving Money because it all begins with taking charge of your personal finances.

Header photo by Tim Pierce.

14 thoughts to “Seven Charts to Challenge the Popular Middle Class Money Narrative”

  1. Awesome analysis Lars-Christian. I’m kind of an economics nerd and geek so these graphs get me going a little bit…

    It’s definitely odd that as incomes have came up, the savings rates have gone down. Will people learn?!? I’m glad that my parents instilled in me solid saving habits.

    1. Yes, Erik, it’s quite something. Earning more to spend even more will, of course, never lead to any sort of financial freedom. That’s something I hope to change, even if just in the tiniest of ways!

  2. It’s a very interesting analysis. It does however raise an interesting sub question. Is the increase in consumption due to less spending control or because society wise we’ve changed the definition of minimally viable consumption to get by? On the latter things like cell phones are beginning to become considered minimally viable whereas they didn’t even barely exist at the begining of your chart. I’m not even talking about data plans here. The same with internet. At this point internet might be considered a need when looking for a job or learning. Now there are still free and frugal options like the library but something to think about. Both parents working is another. It likely means two cars if they go in opposite directions. It can mean day care costs. Finally you have real estate, but not necessarily in the way your charts show. Real estate is largely local so costs inflate near jobs. So higher rates near good employment mean longer commutes or higher costs. I’m not giving an answer to the question here, just raising more questions..

    1. You bring up some great points!

      Personally, I think the increased consumption is a result of several factors. You may be right that minimally viable consumption has increased throughout the past few decades, but I’m not entirely sure of that myself. I think consumption, on average, has increased mainly because consumption has become increasingly important to the general population. We are constantly being bombarded by quick, flashing stimuli trying to convince us to spend our hard earned money, so it’s hardly surprising that consumption increases in importance at the expense of other areas.

      In terms of your concrete examples, I’m fairly confident that you can cover your minimally viable consumption on consumer electronics and connections with a few hundred bucks per year, so I don’t think that’s a budget breaker. When it comes to both parents working, car costs and real estate costs in metro areas, those are very valid points. The idea that I’m trying to get across is that it’s possible to design a life, by consciously approaching where to live, how to travel between A and B and what you do for a living, without having to give into the commonly accepted expenditures. It’s just too normal to accept those types of spending as necessities, when all of us actually have a choice with regards to how we design our lives.

  3. I love this post! Anything that defies “common sense” is usually going to be a big hit with me, so thank you!

    One thing I’d like to see though: A statistical analysis of the strength of the correlation between the two lines in the “Real Median Income and Personal Consumption as a Percentage of Income” and the two lines in the “Saving vs. Personal Consumption as a Percentage of Income” charts.

    That said, I am always politely reminding people – to an annoying extent – that “correlation does not equal causation,” but your conclusion is something I would love to “prove” as true because it seems so obvious to someone who chooses to spend little. Anecdotally, it is my experience that a low spender gets a bonus/raise and thinks “Yes! Max the next tax-advantaged account!” But most people get the same bonus/raise and think “I can finally upgrade to the ShinyCorp 80-inch WiFi Bluetooth super smart drone TV/toilet like I deserve!”

    1. Thanks for the comment, Vigilante. I’ll see if I can whip up the correlation coefficient quickly within Excel, and I’ll come back to you with it.

      As for your point that correlation does not equal causation, that is always a very good point to keep in the back of your mind at all times when looking at numbers and examining how observations vary in relation to each other. Generally speaking, I think if you do the reasoning first, and then examine whether the numbers support your numbers you are less likely to make false assumptions.

      Your anecdote is definitely an impression I share, though, and a mindset I want to contribute in whatever small way I can to change.

  4. This is such an eye opening post
    You pulled out some unquestionably good charts that visually drive what is happening home. Time and time again we speak about “lifestyle inflation” and here is that perfect example. People make more and then they spend more. It would be interesting to see what the chart of a follower of the FI community.
    I am sharing this for sure !

  5. Fascinating. I’ve long suspected this and have seen bits and pieces that support your hypothesis, but great job wrapping it all up into one post!

    Another interesting tidbit, I recently found some stats that show homes are actually more affordable than ever, per square foot. The trouble is, home sizes have nearly tripled since the 1950s. Chalk another one up to out of control consumption.

    1. Yeah, that’s true Money Wizard, the increase in size means that American’s are probably spending more money to acquire housing, at least measured up against net worth. The historically low interest rates means that the cost of financing it isn’t any higher in historical terms, as the chart above shows.

  6. Excellent post! It confirms really nicely what all of us in the FIRE community already suspected: There’s overconsumption and it’s holding back people. I am not going to save a billion dollars but everybody should be able to become quite affluent with savings and investing discipline.
    Keep up the great work!

  7. Great post, Lars-Christian. These charts point to an important conclusion why economic growth (and even continued stock market gains) are tied to wage growth and employment. The more people make, the more they spend and more earnings for companies and higher stock prices. This is a ‘virtuous’ cycle, and the new administration in US wants to accelerate this by giving both tax cuts for middle class and for corporates. If these tax cuts come to pass and interest rates remain below 4% for long-term, we could be in for a period of ‘goldilocks’ growth for years. Interesting times.

    1. Absolutely, 10! The growth in the world economy has been fuelled by both technical leaps and an ever-increasing growth in consumption among the Average Janes and Joes. It’s difficult to predict the future, and your guess is as good as mine with regards to how the next few years will look. Over time, however, I’m pretty confident that the economy will keep on growing, and I’ll happily let anyone quote me on that 😉

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