Lifestyle inflation: pocketing America’s spare change since 1950

longhorn cowfish

did you say $75,000??… i’m all ears

Intro:

How did our young, handsome grandparents spend money back in 1950 and how do we spend it today?

a happy couple from back in the day

a happy couple from back in the day

In real terms, our quality of life as Americans is much better today than it was in the past (but maybe not for much longer?). Goods and services are cheaper than ever (such as flights), and salaries are higher too. While these trends might not continue, I thought it would be fun to compare how someone from 1950 would spend their money today.

Going into this project, my guess was that people from 1950 would be able to save a lot more money than we do today. This turned out to be true.

If the average American adopted spending habits from 1950, their savings rate would be 5 times higher, at almost 20% ($75,000+ every 10 years)!

As we know, however, most Americans haven’t pocketed productivity and/or salary gains over the last 60 years. Instead, we have inflated our lifestyles to accommodate all the extra cash floating around.

Lifestyle inflation:

Lifestyle inflation is what happens when someone gets a raise and instead of continuing to live the exact same life, they decide to live larger. Instead of diverting the extra, hard-earned money to savings accounts, they might use the money to travel more, move into a nicer house, buy a cooler vehicle, etc.

I know first-hand how hard it can be to avoid lifestyle inflation. It happened to me in my career as I got more comfortable with large restaurant bills, fancier neighborhoods, and nicer apartments, amongst other things.

cognac

…only the finest cognacs

Lifestyle inflation is a hard beast to tame, and it seems to be getting harder over time. Juliet Schor does great job explaining the challenge of lifestyle inflation in her 1993 book, The Overspent American, the first chapter of which is available free here.

The Overspent American:

One of Schor’s main premises is that we, as social animals, have a tendency to try to keep up with our peers and sometimes even outperform them in life because it gives us a warm fuzzy feeling (and helps ward off feelings of inadequacy).

credit cards

In the past, she says, our peer reference group was smaller and more closely aligned with our own demographic. Today, however, not only are we more intimately exposed to people from outside our own demographic (social media, TV, celebrities, advertisements), but these people are also more widely distributed along the income / wealth spectrum.  In other words, our reference groups have grown much larger and more diverse.

What happens as a result is that we spend more (and save less) simply to maintain our status in these larger, more diverse reference groups.  Basically, we spend more to avoid feeling like a chump.

Ironically, the desire to keep up with the Joneses and avoid feeling like a chump actually makes us more chump-like in the end. We get stuck working longer careers, spending more money, and sacrificing valuable free time simply to pay the credit card bill at the end of the month… a raw deal if you ask me.

So anyway, that is the background to the information below and a big part of the reason I wanted to look at how people managed to live in 1950 with substantially less buying power.

How people from 1950 would live today:

In the past, it was believed that increases in American productivity (robotics, assembly lines, etc.) would lead to increased leisure time and maybe even a 4-day workweek. Sadly, this never came to fruition. The reason, as I’ve discussed above, is that Americans decided to spend all their extra money on stuff instead of pocketing the spare change.

Granted, some of that extra money might have actually added more value to our lives than we lost by spending it (I’m thinking about technology here), but a lot of it probably didn’t really add too much incremental value.

Below are a few charts showing where our appetites for spending have grown the most.

First, let’s start with median incomes:

median income 2012 vs 1950

As you can see, median incomes were almost 34% lower in 1950, at $38,000! We’ve made real gains since then with 2012 median incomes of about $51,000. This represents an additional $13,000 dollars of real income over the past 60 years, most of which has been allocated to additional goods and services, a classic case of lifestyle inflation!

So you’re probably thinking, “well, what kind of things exactly did we spend our $13,000 raise on?” The chart below addresses that question:

Houshold Spending by Category

The first thing that jumps out here is how much less we spend on food today. Productivity gains and (I think) increased trade have helped food become much cheaper relative to income since 1950. But even though we spend a smaller percentage of our incomes on food today you can see that, comparing the 2012 (actual) and 2012 No Lifestyle Inflation columns, if we really wanted to live like someone from 1950, we would be able cut out even more from our food budget.

Another good that has become significantly cheaper over the last 60 years is clothing. Clothing was the third most expensive category for most people in 1950, but today it is actually the least expensive, accounting for just 3% of total spending. Similar to food, we have decreased our spending, but not enough to keep up with the lower costs of production.  Clothing expenses could theoretically be as low as 1% and we’d still have the same buying power as people from 1950.

big family

this family probably spent a little more than average on their clothing budget

Outside of food, the two most important categories of spending for most people are transportation and housing. Housing’s share of total spending has grown 56% since 1950. Even though costs have grown pretty quickly since then, our spending has grown twice as fast. Couple this with the fact that the average mortgage maturity was 14 years in 1950 versus roughly double that in 2012 and it quickly becomes apparent that housing is one of the areas where our appetites have grown the most.

Transportation also occupies a larger share of expenses today, which is to be expected. Larger cities and suburban sprawl require increased transportation spending, but again, not as much as we are actually spending today. Similar to housing, I would guess that auto financing was also much more conservative back in the day, which means that the 2012 vs. 1950 comparison is probably a little understated as well.

Here a look at 2012 absolute spending levels with and without lifestyle inflation (since 1950):

Houshold Spending by Category1

This chart is helpful to show where the actual dollars went. Housing, transportation, and food represent the largest differences, and as mentioned above, housing and transportation are likely very much understated due to increased home and auto financing leverage.

This chart makes it a little easier to compare absolute differences for the typical American:

US Lifestyle Inflation - 2012 vs 1950

Excepting medical care, expenses grew across the board. As a result savings were $7,500 less than they would have been without lifestyle inflation. To put that in perspective, $7,500 of extra savings each year is equivalent to almost one whole day off per week for the average American. So the utopian dream of a 4-day work week really would have been (and still is) attainable for those that chose to spend money like people did in 1950.

Recognizing that not everyone makes exactly $51,000, the chart below shows what percentage changes the typical American would have to make to remove the effects of lifestyle inflation:

No Lifestyle Inflation Budget Adjustments

These percentages can be used to help anyone live more like your young, handsome grandparents. Of course this is more of a directional exercise, but if you have a sense of your spending in comparison to the general public, you can use this as a tool to prioritize certain areas of your budget or simply to recognize and critically assess the things that the general public says you should spend money on.

For example, the typical American household could theoretically reduce their yearly clothing budget by 76%, from $1,700 to $425 if they wanted to live like people did back in the day. And just so the curious readers don’t have to back into the numbers, here is the data table I’m sourcing most of my charts from:

American Spending Habits Data

Putting it all together:

I can hear a few skeptical murmurs in the background, so I want to make one thing clear. I’m not suggesting that people should spend in exactly the same proportions as everyone did in 1950. Needs change; I get that.

Our grandparents didn’t have smartphones, and they also weren’t aware that meat, potatoes, and canned goods didn’t exactly constitute a healthy diet. Heck, they barely even knew that cigarettes caused cancer.

On the other hand, things like housing haven’t really changed much since 1950. At the end of the day, a house is still mainly a shelter, a place to lay your head on a pillow. Granted, cities have become denser and housing prices have increased a bit, but the main function of, say, housing (or clothing) hasn’t really changed that much over the years. What has happened instead is that we’ve decided to take our collective 34% pay raise and spend it on things like marble countertops and $100 jeans.

Another thing I want to point out is that spending like people did in 1950 doesn’t actually mean buying products like this:

old car

It means spending $6,000 per year instead of $8,000. It means buying gently used Hondas instead of new Acuras. And let’s face it; making that kind of switch isn’t really much of a sacrifice.

So anyway, hopefully this was as fun for you as it was for me. My big takeaway is that if you want to save more money, retire earlier, and/or work less, then you should spend closer to how your grandparents spent their money back in the day. This means cutting about 20% out of your budget for the typical American, and especially focusing on some of the bigger expenses like housing and transportation.  As my good friend says, “less is always more.”

On top of that, it also seems like a good idea to be critically aware of lifestyle inflation pressures. Idle hands (or idle raises) are the devil’s play things. Put those raises (and macroeconomic productivity gains) to good use before Instagram #vacation envy gets the best of you!

Methodology:

The spending percentages come straight from this NPR piece, What America Buys. Using 2012 median household income from the U.S. Census Bureau and savings rate data from Credit Writedowns, I backed into the actual dollar amounts for 2012. I repeated the process for 1950 using median household income from Stanford.

From there, I converted the nominal 1950 median household income into 2012 dollars using this inflation calculator. Then I inflated each individual spending category according to its unique price growth trajectory using CPI data from the U.S. Bureau of Labor and Statistics. Finally, leftover 2012 dollars were allocated to savings ($7,500) for the no lifestyle inflation scenario.

It should be noted that a few of the smaller categories didn’t have data sets that went all the way back to 1950. For those, I had to substitute overall CPI data for a few years instead.

And that’s it… thanks for visiting!

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Comments

  1. Preach, brotha, preach!

  2. “$7,500 of extra savings each year is equivalent to almost one whole day off per week for the average American”

    Whoah. That’s an amazing way to look at it!

    It’s interesting to see how much cheaper food is today relative to the past. I wonder what else is dramatically cheaper? Air travel, I suppose. You could argue access to information (wikipedia, for instance). Building materials?

    One thing I was expecting to see in the graphs but didn’t is how much people used to spend on college education vs. now. The average spent must have gone up dramatically, right? I get the impression that back in the 50s college was an expense that mostly hit in your college years. Today, people pay for college for 15 years after they graduate! Wonder how that will influence how these numbers look in another 10 years?

  3. Marvin McDude says:

    When my wife and I were looking at houses a few years back, we were bargain hunting. Consequently, we saw some very dated kitchens. Awful wallpaper, barely enough space for a large kitchen table, and definitely no granite.

    This one kitchen in particular that we didn’t like, I felt like I’d seen it before but I couldn’t put my finger on it.

    The other day I was watching season 1 of Mad Men, and I realized that the kitchen that my wife and I found unappealing was strikingly similar to the kitchen in the Draper family home.

    Yes, I realize that tastes change, but if it’s a kitchen that Betty Draper could take pride in, maybe I need to re-evaluate my own tastes.

    Moreover, I suspect that someday all the gorgeous kitchens with granite countertops will look as dated as Betty Draper’s kitchen.

    • Just like Don… never going to be happy with what you have, haha. Just kidding McDude.

      Now if you had said Don and Megan’s kitchen in NYC, I think you really would need to do some serious self-evaluation.

  4. I wonder if clothing expense is less today because we dress so much more casually? Hardly anyone dresses up any more, not even for church, weddings or funerals. So shorts or jeans and tee shirts are much less expensive than suits and dresses. On the other hand, no one back then had 30 pair of shoes.

    • Great point on casual dress, although the goofy people in New Orleans still like to dress up in top hats, tailed tuxedos, and white gloves on occasion, not to mention the fancy dresses. 😉

      And yeah, I’m with you. It is hard to imagine someone with 30 pairs of shoes back in 1950!

  5. Ha. I loved Juliet Schor’s The Overworked American (1993)…but it might just get worse before it gets better. *sigh*

    In a later book Born to Buy (2005), she helps us see how it’s only getter worse. The definition of self is increasingly built with an external focus: personal image. Each subsequent generation seems to seek external validation to feed their sense of self worth. That means we’re even less likely to increase savings because, after all, you can’t show off savings.

    Scary stuff.

    • Thanks for the tip. I’m only casually acquainted with Juliet Schor, but apparently you’re somewhat of an expert, which I guess shouldn’t come as a surprise given your ambitious non-fiction regimen.

      The external validation piece is new to me, but extremely intuitive. It does seem to complicate the whole spend less and save more thing. Wouldn’t it be nice if savings were somehow a social status commodity?

      Sort of reminds me of one of my favorite satire novels of recent years, “Super Sad True Love Story.” It is set in the near future and everybody is wearing these google glass type things, and when you look at somebody, their credit score automatically pops up (along with other things like public attractiveness rating, haha). Anyway, thanks for stopping by F2P 🙂

      • I hear you on the “external validation” concept. If people are externally-driven, maybe that needs to be the case to make saving sexier.

        The “Super Sad True Love Story” sounds like fun. I’ve ordered it and look forward to reading it. Thanks for mentioning it.

  6. Interesting read…love the revealing charts. But nothing said is not true. Many people today live such a high consumption lifestyle today. We all want more and bigger. But these things cost…not just money, but in my opinion, we are trading away part of our retirement life for these things.

    Thanks for sharing…best wishes! AFFJ

    • Yes, couldn’t agree more, but sometimes it is so easy to forget. That’s one of the things I love about PF blogging; it really helps make it easier to stay on the straight and narrow 🙂

      Appreciate the support AFFJ!

  7. Great job. Very interesting. I enjoyed reading this.

  8. Hi-enjoyed your blog. Just a quick comment-clothes probably cost more in 1950 because they were of a much better quality. If you look at the way people dress today and in 1950 it is day and night. All you have to do is look at pictures from the old days and see how well-groomed and well-dressed everyone looked. I was at the airport the other day and it AMAZED me to see how many people looked like they had just rolled out of bed and basically wearing throw-away clothes, i.e. shorts, leggings, t-shirts and what looked like pajama pants. It makes sense that people paid more for quality clothing then and are paying less for throw away clothes now. Anyway, I enjoyed reading your blog-very informative.

    • Thanks for the comment Mallory!

      You raise an interesting point. I wonder what fashion would have looked like in 1950 if the same cheap and disposable fashion options were available like they are today.

  9. Is the median income for one full time wage earner or for a household? My understanding was that the only reason that real median household income has increased in the past 50 or 60 years is that the households with more than one wage earner pulls up the average.

    Which is why it surprised me that there is no mention of childcare expenses. While paying for childcare may be a phase that only lasts for a fraction of a some households’ working life I’m surprised that it doesn’t add up to enough to include in the expenses.

    According to
    http://www.census.gov/newsroom/press-releases/2013/cb13-62.html

    32% of families pay someone for childcare of at least one child and the average payment is 7% of family income.

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