It’s Tough to Invest for Tomorrow When You’re Just Trying to Make Ends Meet

One of the keys to moving up the economic ladder is being able to save for and invest in the future. But this is a huge challenge for lower-income families, whose incomes on average go almost entirely to cover basic necessities like housing, food, and getting to work.

The latest data from the US Bureau of Labor Statistics’ Consumer Expenditure Survey (CE) make the point clear (see chart): The less money you earn, the more your budget is eaten up by basic needs. Conversely, the more money you earn, the less you spend on basic expenses and the more you can put away for retirement and personal insurance.7.20.15 Spending by Quintile

This divergence in spending patterns between wealthy and less well-off families has real implications. For one, with far less ability to invest in long-term financial security, such as by purchasing a home or saving to pay for a college education, families with lower incomes risk falling even further behind wealthier families. Derek Thompson put it well in his column highlighting the CE data: “When you have money, you spend less on the stuff that ensures you survive the day and more on the stuff that ensures that you (and your children, and your possessions, and your estate) survive and thrive for many years.”

What’s more, the differences in spending between families with lower and higher incomes affects how much they pay in taxes. As we noted in our Who Pays Taxes in California? report, because basic expenses — some of which are taxed — consume nearly all of their incomes, lower-income families tend to pay more of their incomes in sales taxes and property taxes than upper-income families do.

It’s important to underscore that the CE figures reflect family spending on major categories as shares of overall spending within each income group rather than as shares of each group’s income. This means that all the extra income wealthier people don’t spend at all — which they can either save or use to generate more wealth by investing — is not reflected in the chart. In other words, looking at spending as a share of income, rather than as a share of spending, would show an even more dramatic disparity in spending patterns. For technical reasons with the data, however, it isn’t possible to produce a clear picture of spending as a share of income by income group.

It’s also important to note that the data don’t distinguish between necessary and discretionary spending within categories, such as transportation for work versus for leisure, or buying your first home versus a third house. Although all income groups spend on the “basic needs” categories, clearly how much is really a “basic need” differs greatly between richer and poorer households.

For example, on average just over 40 percent of the bottom fifth’s spending goes to housing, or about $780 per month. Meanwhile, just over 30 percent of the top fifth’s spending is on housing, which amounts to about $2,590 per month on average. Despite allocating significantly less of their spending to housing, the top fifth spends more than three times as much as the bottom fifth does, on average.

Even with these caveats, as well as other shortcomings, the CE still provides valuable information about family spending. Lower-income families out of necessity have to spend most or all of their income just to get by, and things are getting harder for families in the middle of the income range as well.

However, smart public policy choices can help raise the economic prospects of families toward the lower end of the income spectrum. State policymakers in June took a significant step toward giving very low-income families more room to breathe when they enacted California’s first-ever state Earned Income Tax Credit (EITC) as an “add-on” to the successful federal EITC. They could do more by ensuring the new state EITC reaches eligible families with strong outreach efforts, expanding the state EITC so more low-income families could benefit, and increasing security in work scheduling, for example. Further, policymakers could work to reduce the costs of necessities like housing, higher education, and child care. Easing the outsize burden of day-to-day necessities on the budgets of lower-income families would boost their ability save for and invest in the future.

— William Chen