My Two Cents - "Crossing the Rubicon"

2/2/2007

Attaining a recent victory in the arena of information and ideas, I was finally able to convince a regular reader of this column that he in fact is a victim of inflation. It was a long war and there were many casualties, most easily expressed in terms of lost sleep on my part. It was an epic battle with kicking and screaming, but finally, common sense prevailed. At this point, I thought things would get easier. However, that is not the case, which provides an almost perfect segue into this week's piece.

As consumers, the obvious solution to fighting inflation is fairly simple to understand. There are two choices: we either increase our purchasing power or decrease our purchases. It doesn't get much easier than that. As is the case with most folks, it is generally easier to start by looking at the expense side of the balance sheet and figuring out where the 'fat' in the budget lies and cutting it. As you can probably now guess, this is where the problem arises. And it leads into another ongoing thread that I've had with a good friend of mine for about the past 6 months or so now: the economics of want.

It strikes me as odd that most people, especially the younger crowd will shell out well over $100/month in many cases to own and operate a cell phone that plays games, sends text messages and causes countless traffic accidents rather than save that money and put it away for the rainy season. A rainy season that is no doubt approaching in the form of either radically decreased or nonexistent social security benefits. What is even more thought provoking is that they will say that they NEED these phones. For this generation, phones, and other such gadgetry are the staples that milk, bread and eggs used to be. It occurred to me that it might make sense to compare the items in a budget 10 years ago with those in a budget today. Luckily, I am fairly retentive when it comes to record keeping and still have this information:

Rent
Utilities (Cable, electric, phone)
Car payment
Gas
Food
Insurance (2 cars/renter's)
Spending
Savings
Clothing
Miscellaneous (gifts, doctor visits etc)

At this time, my family's monthly income was around $2200. Expenses totaled around $1700. Any extra money was automatically saved for the inevitable unexpected expenses that pop up from time to time and for retirement. Looking at that budget, there really isn't a lot of 'fat' to cut. Sure I could have cut back spending, get rid of cable and the clothing portion and saved about $200. Compare this budget with that of my reader who so graciously agreed to provide his information for the benefit of others:

Rent
Utilities (Cable high-definition package, electric, phone, Internet)
Cell Phone
Car Payments (2 cars)
XM Satellite Radio
Netflix
On-STAR
Health club Membership
Insurance (2 cars / Renter's / Health contribution)
Food
Spending
Clothing
Miscellaneous (Cigarettes, gifts, doctor)

This family's combined household income is somewhere around $3250 per month with expenses totaling nearly $3900, meaning that this particular family is running over a $600 deficit each month. This deficit is financed largely with credit card debt on 3 cards with APRs ranging from 4.99% to 24.99%. In their case, the obvious first step is to eliminate some expenses. The problem arises in that people perceive the NEED for all of these items that would have been considered extras a decade ago. Certainly, some of the items such as the Internet, cell phones and high definition cable didn't exist or weren't widely used a decade ago. My reader in fact told me it would be impossible to make any cuts at all since it would negatively affect his standard of living. Cutting is not an option. The obvious question I have is how can one hope to mitigate the harmful effects of inflation when they are unwilling to trim expenses, have no savings with which to generate additional income, and in general are comfortable going deeper in debt each month?

What I find to be rather fascinating in all this is how wants have evolved into needs. This is for sure a function of how technology and gadgetry have woven themselves into our everyday lives, but even more than that it astounds me how we are willing on such a grandiose scale to go into debt to finance our continued consumption of these very unnecessary products and services. Carrying a balance on the credit card used to be the proverbial Rubicon. It was a strong signal that it was time to change spending habits, create budgets and the like. Perhaps it is because credit cards have been used as tools of convenience that we don't even think twice about swiping. Consequently, holiday spending that used to be paid off in a month or two is now lingering longer and longer on the balance sheets of many families. We seem to have reached the point where there are no wants, only needs, and like a heroin addict, we will do whatever we have to do to keep the gadgets flowing.

Which brings me to my final point. Each week I receive replies from readers wondering how the average person can't see any of what is going on and how people can be so ignorant of how money works. All I have to do is look around this crowded pub to get my answer: People don't see these things because they are too busy being wrapped up in the largesse of the yuppie lifestyle. In many ways credit has simultaneously become both a short-term equalizer and a long-term destroyer of our standard of living all wrapped into one nifty little package. Credit truly can be the proverbial Rubicon; many people cross that line and never go back. The sobering reality is that in this brave new world, they not only 'want' to cross the Rubicon; they 'need' to.

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics.

This article and other information is located at http://www.my2centsonline.com Please feel free to distribute, copy or otherwise disseminate this information.