Doing the math

There's a lot about American consumer behavior that baffles me. Their reaction to the economy this year is a perfect example.

Back in the late 1990s, at the height of the dot-com boom, I remember writing a story as a business journalist saying that the average American not only had no money in savings but was several thousand in debt. This wasn't a case that economy had soured so people were using their credit cards to make ends meet. It was a time of incredible prosperity and people were making the lifestyle choice to spend more than they made.

This always confused me. If you can't afford the new TV or tennis shoes or video game now, how will it be different when you charge it, adding the high interest costs to the price of the toy? It won't, but the good news for retailers and banks was that Americans are so gifted at denial that they could pretend the day of reckoning would never come.

Add a decade of increasingly easy credit and you really fuel the fire. No longer did second mortgages carry the stink of economic failure -- they were home equity loans, so much more palatable. Commercials showed happy middle class families using home equity loans to not only pay off their debt but to even have enough money for a swimming pool or a vacation.
Never to save, that I recall. Always to keep on spending.

Maybe because I grew up with working class parents who constantly extolled the value of money, it gives me a knot in my stomach to be in debt. John and I share this priority, and in spite of our ridiculously high rent, we pay off our credit cards every month and have a nice nest egg in savings.

That's part of what makes it hard for me to understand the American ethos of moving into ever bigger houses, ever farther away from work, driving increasingly gigantic cars -- then complaining when the cost of gas and heat go up.

Let's do the math just to make my point. I loved story problems as a kid.

Let's say you live 50 miles from work, so your commute is 100 miles a day five days a week.
That's 500 miles.
Because you're your kids' chauffeur, shuttling them to soccer practice and all the other requisite activities I didn't do, and my parents would have made me ride my bike to if I had done them, let's say you drive 20 extra miles of errands every day.
That's another 140 miles, for a total of 640 miles a week.
You drive a Navigator because an SUV is so much cooler than a minivan, so you get 18 miles to the gallon on the highway, 13 in the city.
We'll split the difference and call it 15 miles per gallon.
To do your 640 miles each week, you must buy about 42 gallons of gas.

At $1.50 a gallon, 42 gallons of gas costs $63.
At $4 a gallon, it's $168.
All this screaming about the high price of gas causing people to cancel vacations or finally consider a hybrid car is about $100 a week?

I'm not saying it's fun to give an extra $100 of your income to the oil companies so they can post record profits. But really, if your home budget can't absorb an extra $100 a week without drastic measures, that might be a sign you want to re-evaluate some of your choices so you have more of a buffer.

A friend asked for my help in making a budget to get out of debt. The first thing I advised was that she had to pay for everything in cash for a month and write down every expense. We then reviewed her spending to look at the difference between necessities and extras, and to look for ways to do the necessities cheaper.

Some things are easy -- no, you don't need another expensive purse, you can do without the mani-pedi. But I think part of our problem is that we've lost the ability to tell the difference between necessities and luxuries. Our parents got along fine without DVD players, answering machines (well, now voice mail), garage door openers and the other gizmos we now simply cannot live without. Look around your house right now and mentally list everything you didn't have 20 years ago, and consider for a second whether you really need it.

Yes, food is a necessity. However, going out to eat is typically a lot more expensive than cooking for yourself, and processed, prepared foods at the grocery store are typically more expensive than simpler foods. Trimming one or two lunches out during the week can save money. For some families, one more dinner in a week might equal the difference in gas.

I would call coffee a necessity. I do not call a $3-4 a day latte habit a necessity. Make your coffee at home, put it in a travel mug, and ta-da, you might have just found a good chunk of your gas budget.

Clothes are a necessity. But one woman I know who seemed always to be complaining about being broke also always seemed to have new outfits. Take care of what you have and stay out of the stores if you don't have the cash. Oh, and I just read that about 65 percent of the clothes women dry clean could actually be machine washed, so if you hate spending on dry cleaning like I do, try out your gentle cycle or give those Dryel bags a whirl.

My personal favorite -- the car payment. In most places, yes, you need a car to get around. But I still can't wrap my head around leasing cars. You build no equity and you never get yourself to a point of not having a car payment. Here's an idea: buy a two-year-old car, pay it off, and enjoy the pleasure of driving it a few years without a car payment. Then when you finally do sell it, put that money down on your next two-year-old car. My '93 Escort had I think 140,000 miles on it when I sold it to leave for New York, and it had been paid off since John and I started dating.

Cut out one car payment a month and you've probably covered the price of the gas increase. Do it for two family cars and you might find some money for a savings account. No, Andy Jacobs, do not spend that money on a pool or a vacation.

I think unfortunately our typical middle class lifestyle becomes a vicious cycle of spending. If you live so far from work, your commute is so long, you might feel you have no time to cook so you get trapped into convenience foods and restaurant food.

Here's something I'd love to see happen from the economic downturn -- people re-assess their lifestyle choices and make some different decisions. Live closer to work so you have more time to cook and spend more time with your family. Live in a smaller house and drive a smaller car so you're a little more immune to fuel costs, and as a bonus, maybe you're better to the environment. Skip the $200 jeans, buy a no-name purse, and generally scale back a bit so you can put some money into a nice, safe savings account. (yes, I know, your 401k is painful right now. me, too.)

Next time you're tempted to grouse about the rising price of food, heat or gas, try this experiment. Spend the next month writing down every single item you spend money on. Honestly assess whether it's a necessity, and if it is, if there's a way you could do it more affordably.

Our culture has been drunk on spending for a so long that you might find the real issue isn't the price of gas.