Recently I have been thinking about home prices, household spending and debt. My larger concern is that American's are wildly living beyond their means and that this issue is a real long-term problem for all of us. To understand this issue better, I have been looking for symptoms and root causes that might explain our behavior.
While there are several threads in this story, one of them is the number of new expenses that increase our monthly budgets. Things that did not exist before but we find "essential" today, such as cable TV, cell phones and internet access.
After looking at my own household expenses, it strikes me that household budgets have changed a great deal in the last 20 years and those changes are a contributing factor to household debt.
To examine this point, I made a typical budget for a small household in the Seattle, WA area. It is worth noting that some people pay a LOT more for cable TV and cell phones and that these numbers are only for monthly fees, not purchases of new phones, etc. There are also a lot more monthly fees out there, such as a newspaper or website subscriptions, video game subscriptions, and the like.
a household budget strawman
| Month | Year | |
|---|---|---|
| Median Annual Income (2003) | $3,811 | $45,736 |
| Original Monthly Household Expenses | ||
| Service or Expense | Month | Year |
| Rent or Mortage | $1,200 | $14,400 |
| Gas | $65 | $780 |
| Water | $20 | $240 |
| Telephone | $25 | $300 |
| Garbage&Recycling | $10 | $120 |
| Total | $1,320 | $15,840 |
| New Household Recurring Expenses | ||
| Service or Expense | Month | Year |
| Cable TV | $80 | $960 |
| Internet Access | $50 | $600 |
| Cell phone (2 people) | $70 | $840 |
| Total | $200 | $2,400 |
| Rising Household Expenses | ||
|---|---|---|
| Original expenses as % of gross income | 35% | 35% |
| Budget Increase | 15% | 15% |
| New expenses as % of gross income | 40% | 40% |
From this data, we see a typical household used to pay 35% of their gross income for "housing". The new services add 15% to that budget and raise the cost of household expenses to 40% of gross income.
That 5% difference is not huge but it is something, especially if you are looking for ways to cut spending and meet your monthly budget. Moreover, it represents 5% of your income that you could have spent elsewhere and previous generations did spend elsewhere. Modern conveniences may be saving us time but they are also adding cost to our budgets.
the new necessities
There are some interesting aspects to these new household services.
- First, they are recurring fees that happen every month and never get "paid" off. (This fee vs purchase issue is a big one that represents its own thread in the larger picture.)
- Their price is largely unquestioned because you "have to have it" and just gets tucked into the new monthly expenses.
- And unlike other utilities such as gas, water or electricity, one pays for these new services whether or not you actually use them; it costs $50 a month simply to have a cable modem whether or not you ever get on the Internet.
The last point in particular is an interesting one. As consumers, why do expect to pay only for the electricity or water we use (based on a personal meter) but we are willing to pay a flat fee (and sometimes an additional fee) for other services? Wouldnt it make sense to pay only for the cell phone calls one makes instead of a flat fee for minutes so that if you dont make a call, you dont pay anything? The same goes for Internet bandwidth or cable TV. Why pay for 300 TV channels when you only watch 5?
I can understand why companies prefer the flat fee - they make a consistent and predictable income regardless of usage. Moreover they regularly profit on people who pay for the service but barely use it. I would have expected some competition to enter and take advantage of the fact that consumers are broadly paying for more than they actually use by offering a pay-for-use system. Maybe that is coming?
