Why Is Everything So Expensive?
Jordan Goodman (Personal Finance Author) gives expert video advice on: Why is life so expensive?; Why are things so expensive?; How much is the cost of living expected to go up in the coming years? and more...
Why is life so expensive?
Life is so expensive because people's tastes are more than their income. Our entire culture is based around consumption. You don't see a lot of ads for saving or investing on TV. It's all about spending, and people are very good at marketing things and making you want to buy stuff whether you want to or not. There is a difference between wants and needs, and a lot of people buy based on their wants instead of their needs. Particularly around the holiday times, they get wrapped up with the music and smells and everything going on in the malls and they end up spending more than they can afford and making up the different with debt in many cases. So that's why people are spending more. They are wrapped up in the culture of consumption. They want to have it now. It is also a culture of instant gratification. In the old days, our parents might have actually saved up for something before they actually bought it. Today we buy it first and figure out how to pay for it later. That gets people in a lot of trouble.
Why are things so expensive?
One of the reasons things are so expensive is there is more demand for commodities around the world these days. China has been growing extremely fast, over 10%. India growing very fast. They are developing a huge middle class which demands more commodities. So the prices of aluminium, copper and gold and coal and all the things that go into creating an economy are going up. And that's something that we, in the United States, are also feeling as well. Other areas that are going up. Healthcare is going dramatically. The baby boom is retiring and uses more and more healthcare so that's a big expense. Oil is going up dramatically. There is less supply. The old oil fields are burning out. There is more demand so oil is going up, as are gas prices that go along with it. So, in general, the big demand for commodities from the developing world is causing the prices of what we buy everyday to to go up.
How much is the cost of living expected to go up in the coming years?
Well, the cost of living is expected to go up typically 2 or 3 percent is what the official numbers say, that's where inflation has been. But I think if you actually look at what people are spending; it's actually much more than that. I like to say that there's a personal consumer price index that people might have. If you're older and everything's established, you're not buying that much, you might have a very low consumer price index. If you're in your twenties and thirties, and you're buying everything for the first time, you have children, and so on; you're going to have a much higher consumer price index. So I think the reality is with higher energy costs, higher health care costs, and cost of college education going up, that in fact, your cost of living is going to be going up five to ten percent in many cases. For most people who are in their younger years, well, they're still building and buying things.
My family works two jobs each and we still can't afford anything,why?
A lot of people are in this situation, where the husband and wife are working, and they still feel they can't afford anything. The reason is, in many cases, if they actually sit down with a budget - the expenses they have are higher than the income they are bringing in. In many cases their expenses are going up because their gas costs are going up, their healthcare may be going up, cost of college education may be going up, but their incomes are not going up along with it. In many cases people are making up the difference between their expenses and their income with debt. So, debt then adds to the burden and makes it difficult for people to afford things - because they're having to make the debt service payments all the time. Lately, a big problem has been mortgages. People got mortgages a few years ago that were below market - two and three and four percent, that would adjust up to the market rate in two or three years. And that is now arriving - and so a lot of people are having their mortgages go up dramatically - double, triple, in many cases. And if they either can't afford that, or it's very difficult to afford it, means all the other things they need to spend money on, become much more difficult. So, that's why a lot of Americans are over their head in debt, right now, trying to keep up with the higher cost of living.
Where does all my hard earned money go?
If you actually look at your budget, a lot of your hard-earned money goes to automatic things the same every month. You have either rent or mortgage payment, you have a certain amount of energy costs, a certain amount of food costs. There are certain things you have to pay for every month, and a lot of people don't have much leftover after they've paid for their basic necessities each month. The solution for this is to set up automatic savings programs, so in addition to all these automatic costs you have every month, one of the automatic costs should be a savings program, so that your money is growing for yourself, typically in a stock or bond mutual fund, as opposed to a savings account where it's earning 1% or less. So the solution to spending more than you're taking in is to have some of your spending going to something that's building a rainy day fund for the future.
Why are houses so expensive?
Houses are expensive because the cost of materials going into them has gone up a lot. Lumber and copper for all the plumbing and electrical - all the components of houses have gone up a lot. But also there's been a speculative binge in houses in the last few years. That's certainly cooled in the last year or so, but in many cases, people are getting into houses as a way to invest, as a way to flip and to make money by buying and selling the house itself. So that's made the house price go up a lot. With interest rates having gone up, it means the cost of houses is a lot higher. And also property taxes. To support local communities, lots of property taxes have been going up as well. So the cost of housing is not just the house itself, but it's the mortgage, it's the property taxes, it's the utilities, it's the upkeep. And that has risen to very, very high levels making many houses unaffordable for people. I heard a recent statistic that at current prices in California, only 16% of people in California could afford the home they are living in today. That is, they bought this home years ago but because the price of utilities, property taxes and other things have gone up, many many people could not afford the house they live in today. And that's making it more difficult, particularly for the first-time homebuyer to get started buying into homes.
Why does food cost so much?
Food cost so much because there's a lot that goes into it that's not just the food itself. There's fertilizer and all the things the farmer has to put into the machines that they buy. Transportation is a very big part of food, getting it from the farm to the grocery store cost a lot and with oil and gas prices higher that's a major part of the cost of food these days. In addition a lot of people want organic food and that cost more to grow and uses less pesticides and so that in effect cost more as well. So food is a major part of people's expenses and it's been rising pretty sharply because of the cost of creating the food. One dramatic example is corn, corn prices have gone up a lot because corn is being used for ethanol and not just for human consumption. What that means if there's a lot more demand for it, from ethanol than in fact the price goes up and that spreads throughout our entire economy, corn is used in lots of other products, so something like that makes the price of corn go up which than makes other commodities go up because if farmers plant a lot of corn than they're going to be planting less wheat and cotton and other kinds of things so there's less of those. So that in general is why food is going up. Another factor is a demand around the world, China and India and Indonesia and other places are taking a lot of our grains and a lot of our food as well so we're supplying them around the world and we're just not able to keep up. So food is high and it's going to keep going higher.
Do most Americans live beyond their means?
Most Americans do live beyond their means. On a national basis, America has a negative savings rate. Means we actually spend more than we save. Now some people save a lot but a lot of people are in huge amounts of debt. There is over 900 billion dollars in credit card debt alone, in this country. Something like 3 trillion dollars in other combined debt, non-mortgage debt, things like car loans, student loans, medical debt and so on. And then another roughly 10 trillion dollars in mortgage debt on top of that. So people spend what they don't have, make up the difference with debt. In general, debt has been easy to get into. Banks have loads of money and they want to lend it out. So it makes it very tempting for people. So a lot of people do live beyond their means.
Which American cities have the highest cost of living?
In general the large cities have the highest cost of living. That would be New York, San Francisco, Honolulu is very expensive, Chicago. You have higher real estate taxes. There's just much more density and therefore more wealth and therefore people can afford real estate. The taxes tend to be higher, the cost of services tend to be higher. I mean if you're in New York and you have to park, its $25 an hour. In some small cities it might be $5 or less. So in general, the bigger cities are going to be where the higher cost of living is.
Shouldn't personal income adjust to meet the demand of the market?
One of the big problems with people's budgets is that expenses are going up faster than their incomes. You might say, "Why is that?" Well incomes are not going up as much because we are competing with the world on the labor front. In the past, if we just had domestic employees, you had more bargaining power. But now if you are a computer engineer or an architect, you're not only competing with other people in the United States, but you're competing with people who are just as good in India, or China, or Indonesia, or other places, who are just as qualified and will work for a tenth of the price of what you will. So that makes it hard to compete on the wage front, when the same labor is available overseas at much, much lower cost. And that's why you're seeing a lot of American companies moving factories and all kinds of facilities to China, to India, to other places where they can get much, much lower labor costs and still very high quality labor.
Would my family be better off moving to a small town?
There are pros and cons of being in a small town versus a medium size town or a big town. The advantage of a small town is certainly that your cost of living is going to be lower. You are going to be in an area where all the stores are right there. Your taxes are going to be lower. In general, there are going to be fewer services. The disadvantage is you are going to have fewer employment opportunities. If you have a smaller town it just has fewer employers to go to. If you have some kind of job or a profession that can be done online or on the phone, maybe it is not important if there are local employers there. If you are a day trader who is getting a lot of stocks, it doesn't matter where you are. But in general, medium and bigger size towns are going to have more services, better schools, more kinds of shops that you can shop in and a more diverse population. But you have to pay for that in the form of higher property taxes and in general, a higher cost of living.
We're expecting our first child, how much is that going to cost?
If your expecting your first child, its typically going to cost from birth to the age of 18 something like $300,000. Now, you don't have to pay that all at once. It starts off with baby food and diapers and becomes bicycles, and by the time they are 18 they have got to get their Ferrari and maserti, I guess. But it does add up over time. A lot of people do not think of the financial consequences of having a child. And this is not even counting college. At which today for private schools is well over $40,000 and some schools are over $50,000. And public schools are even $20,000 or so. So that adds to the cost of having children dramatically. And having two of them doesn't save that you that much money either. You can have a few hand me downs, but they all eat the same thing and child number one cant share food with child number two. So this is not a case where counting a scale makes much difference on saving you money.
How much of my expenses should I cut to see a difference?
There are a lot of ways you can cut your expenses to see a major difference in your budget. In food, you can go to wholesale clubs and buy generic foods instead of brand names. In health care, you can use something called medical repricing which we can find out about at medicalrepricing.com where instead of paying hundreds of dollars in premiums, you get your health care costs cut by 50% or more. In gasoline, you could shop around for the best service station with the lowest price. There's a website, gasbuddy.com, for example, that's constantly being updated that will tell you what's the best prices for gasoline. In mortgages, you might want to get a mortgage where the rate only goes down and not up. That's what's called an automatic rate cut mortgage or arc loan which you can find out about at arcloan.com. So there's definitely some ways you can cut your expenses. First, what you have to do is see where you're spending it and then see what are the alternative ways to cut it and then do that in a consistent basis across all your spending.