This is how Americans spend their money1 (according to my study Bureau of Labor Statistics):
As with most aggregates when you’re dealing with hundreds of millions of people, everyone’s spending is likely to be slightly different from this average.
But directionally this number looks right to me from a big-picture perspective. The two biggest line items for the majority of households are housing and transportation.
These two categories make up half of the budget in the average American household.
If you want to get ahead financially, you need to free up housing and transportation. If you spend too much money on your living conditions or your vehicle or both you will have a hard time building wealth.
It got out of hand.
Check out this chart that shows the percentage of residents by country who pay $1,000 a month or more for their auto payments:
One-quarter of people in Wyoming spend more than $1,000/month! More than a fifth of people in Texas do the same. This is almost 1 in 5 in California.
This is crazy personal finance.
There are several economic reasons for these payments to rise in recent years. The lack of supply chain has driven the cost of cars and it is still not normal anymore.
In the last 3 years alone the price of new cars has increased by more than 20%. Used car prices up more than 45%:
Anyone who has had the misfortune of having to buy a vehicle has been in a tough spot in recent years.
But that is not the whole explanation. Take a look at the growth in luxury vehicle purchases over the past 10 years:
This is almost 20%.
I’m an A to B guy when it comes to my vehicle. Some people enjoy driving a nice car, truck or SUV.
And that’s fine – let’s say you have the rest of your finances and you’re saving money.
If you’re not saving enough, your ridiculously high SUV or truck monthly payment is likely to hold your wealth.
And if it’s not your choice of vehicle, it could be real estate that’s holding you back.
The New York Times made the case this week that the housing market is worse than you think.
I tend to agree.
They show the number of single-family homes for sale remains near the lowest level in 40 years:
But this chart is even worse than it looks. The Times points out that the US population has grown by more than 40% since 1982.
There were about 230 million people in the United States in 1982. Now there are more than 330 million. The ratio per person is now worse.
The same is true when it comes to the number of new houses being built. I adjust US housing starts (when construction starts on new homes) for the population going back to 1959:
We are building more houses compared to the size of the population in the 60s, 70s and 80s. Things were pretty good in the 90s as well.
In 1959 there were roughly 176 million people in the US and we built about 1.6 million houses a year.
We now have 333 million people and a more recent reading shows that we built 1.4 million homes in the past year.
Unfortunately, There is a lot of luck involved when it comes to your housing situation. Sure, there are people who buy more houses than they can afford but many people get screwed or lucky based on the timing of when they were born and where we are in the housing cycle.
Housing prices have come down from higher mortgage rates but the same mortgage rates have made it more expensive to buy a home today.
Things will level out eventually and hopefully mortgage rates will come down in the coming years.
But if we do not rebuild houses in this country, buying a house will be more difficult and harder for young people in the future.
Michael and I talk about car prices, the real estate market and more in this week’s Animal Spirit video:
SUBSCRIPTIONS Compound so you never miss an episode.
Now here’s what I’ve been reading lately:
1This is as a percentage of income so after tax.