Mortgaging our future? Michigan study says we're poorer but still spending
Michigan has become poorer over the past decade, but many of us are still spending as if our incomes haven’t taken a hit.
That behavior has serious implications for the state’s economic future, according to a new Michigan State University study on household financial conditions.
Too many of us are relying on debt, and raiding savings and retirement accounts to try to maintain unsustainable lifestyles, according to the study by MSU economist Lisa Cook.
Data from several household surveys conducted in 2009 and 2010 found that although 67 percent of Michigan residents have budget plans, 81 percent don’t adjust those budgets when their income falls.
- Click here to download the MSU study.
One small web-based survey conducted between June 2009 and April 2010 found that 40 percent of Michigan households had at least one person who had either lost a job or taken a pay cut in the past six months.
Median personal income in Michigan fell from 8 percent above the national average in 2001 to 8 percent below it in 2009, indicating a broad deterioration in household balance sheets, according to the study.
But instead of cutting expenses, most residents tapped their retirement savings and credit cards to maintain spending, the study found.
Cook said these behaviors show the need for more consumer education on drafting budgets and sticking to them. Her study also recommends incorporating personal financial education into high school math and economics curricula.
“This conversation has to start a lot earlier,” Cook said. “We need to have this education because debt has gotten out of hand.”
James McTevia, a Detroit-area corporate turnaround specialist and author, agrees. But he says it may be too late for the current generation of adults to change its spendthrift ways.
“The only way to change the culture of debt is by educating a younger segment of our society” not to spend money it doesn’t have, said McTevia, author of “The Culture of Debt, How a Once-Proud Society Mortgaged Its Future.”
Over the past 50 years, the advent of credit cards, home equity loans and loosened credit standards have allowed people to spend far beyond their means, McTevia said.
On top of that, we’ve developed a false sense of optimism that the future always will be better, deluding us into believing we’ll be able to repay the debt.
“That’s been especially true in housing,” McTevia said. “We thought housing prices would always go up, but for the first time in history we’ve had a reversal.”
Cook said other fundamental changes in the economy require that citizens save more and spend prudently.
Many households have absorbed parents, adult children and other family members who are part of the legion of long-term unemployed.
Traditional pensions are exceedingly rare, replaced by 401(k) retirement savings plans that workers must supplement if they expect a decent income when they retire.
College tuition costs are rising rapidly, in part because of declining financial support from state government.
The good news is that companies are starting to hire again after a decade of widespread layoffs in Michigan.
But workers who become re-employed or see their paychecks increase as the economy recovers need to realize there eventually will be another downturn in Michigan’s cyclical economy.
“What we don’t want is consumers being prudent for a short period of time and then returning to their profligate ways of the 1990s and early 2000s,” Cook said.
Contact Rick Haglund at haglund.rick@gmail.com.
Comments
stevo
Thu, May 19, 2011 : 3:06 p.m.
no debt and want to keep it that way. we're careful with money, except for vacations.
John B.
Thu, May 19, 2011 : 5:15 p.m.
Why not be careful about vacation spending as well? Once you've returned from a vacation, it's over, you have nothing to show for it except bills, and the payment begins....
Gordon
Thu, May 19, 2011 : 2:14 p.m.
A necessary article; but it is also a reflection of how people maintain a style of living after the financial hit. What is as an important is the fact citizens want the same services from their government when the government has been affected by the finacial problem. Politicians will create the legislation necessary to fulfill the publics demands because they like their jobs (another topic). Then a financial crisis comes along and the machinery that serves the public has becomes its own self-serving activity. Now, we don't know how to un-wind it because we are dependant on it. Sounds like the credit cards use, the withdrawals from savings, and the non-funding of retirement by the public to maintain life style. Plus, some thigs are not so easily un-wound to reduce monthly spending both for governments and citisens. Housing for one and other contractual obligations. Tough decisions and more should be discussed.
Cindy
Thu, May 19, 2011 : 1:04 p.m.
I'll be 61 this month, been unemployed almost 3 years now but by slashing budget still pay my mortgage, have no credit card debt, and have not dipped into retirement savings (only liquid savings). My partner, also 61, was unemployed 20 months but now has a temporary job with no benefits. She is putting 50% into her 401K despite having to pay $528/mo for health insurance with no prescription coverage. Money is very tight. When you go from 2 relatively well paying jobs to one average paying job, budgeting is a must. She uses debit card for almost all her spending to help track where her money goes.
Corey Lord
Thu, May 19, 2011 : 12:09 p.m.
To me this article also points to why such a large amount of people thinks our state government can function with unsustainable spending habits. If the majority of people don't adjust spending when they make less why would they think the state should do the same.
Chip Reed
Thu, May 19, 2011 : 11:14 a.m.
"we've developed a false sense of optimism". That is to say, we were force-fed it by advertisers and political leaders. The myth of progress is very comforting, but it is expensive to sustain. Heck, I even had to cancel my newspaper subscriptions.
Chaz H
Thu, May 19, 2011 : 11:12 a.m.
Great article, fiscal responsibility is very important. But that poll is missing a few options, like "I spend more because I make more." I am sure I am a minority in Michigan, but I make close to double what I made ten years ago, so my disposable income is quite healthy. I never carry a balance on my credit cards, I invest a nice portion of my earnings each month, and my only debt is my house (which I am horribly upside-down on because I bought it in 2003). Every time I do not like something about my job, I remember that I am fortunate to have one. If I ever lose it, or take a pay cut, I will stop or cut spending. The concept of not spending money I do not have is not difficult for me, but it seems to be for many people.
John B.
Thu, May 19, 2011 : 5:12 p.m.
Chaz: You are indeed very fortunate. Very, very few households are making significantly more now that they were ten years ago, especially in Michigan. I assume you are relatively young. You should not be upside-down on a home that you purchased in 2003, though, I would think. The peak (in home values) was more like 2006. Our home, purchased in 2000, is currently worth a bit more than what we paid for it (and is paid for, thank goodness, as we may see another significant drop in home prices soon, I fear). My advice (to anyone, not just you) would be to get to debt-free status as soon as possible. It is amazing what you can survive if you aren't leveraged with any debt....
Cindy
Thu, May 19, 2011 : 1:42 p.m.
I spent more when I made more, too. Like you, my only debt is my house, which is underwater from what I paid for it in 1996!!! I was smart enough to get both a $52,000 home equity line of credit before the mortgage meltdown, which was cut to $30,000, but so far haven't needed to tap it. I also got a 7% credit card when I had income, which I use but pay off every month. Basically I was preparing my finances to weather a potential layoff because I could already see before the 2008 collapse that the auto companies were starting to have massive buyouts & later layoffs. My general theory in life is hope for the best but plan for the worst. I wish I could refinance to a lower interest rate on my mortgage now, but with no job & upside down mortgage, don't think it will ever happen. I'd feel better approaching retirement if that was paid off or down more. That's what I would have done if I was still working.
cinnabar7071
Thu, May 19, 2011 : 11:11 a.m.
I'm still spending the same, maybe a little more but thats because I have no debt. Now if I had debt that would be my main focus and spending would be cut to nothing. If I were the gov't I would be filling out credit apps for my kids and spending their money.