Different Priorities for People in Different Income Groups
According to the U.S. Bureau of Labor Statistics, people from across the income spectrum have different priorities when it comes to their spending. The graph below from npr.org shows average spending patterns for U.S. households in 3 income categories — one just below the poverty line, one at the middle of the income distribution, and finally one at the top of the distribution. 🙂
Here are some interesting notes to take away from this data:
- Everyone pretty much spends the same ratio of their income on housing, clothing, shoes, and entertainment.
- Poorer households tend to spend a larger share of their income on home cooked meals and utilities.
- Richer households allocate a bigger chunk of their spending to education and saving for retirement.
Some expenses are more elastic than others. They take up a bigger piece of the household budget if the household has more access to money. Earning more income is generally a good thing for financial security. But if all new income is being squandered on entertainment then that’s not going to help someone in retirement.
Since my priority is financial independence here is how I like to use the information from the chart. The average person buys a bigger home when he makes a bigger income, as represented by the data. But housing is one of the largest expenses and does not need to be bigger than necessary. By living in my current home for the past 8 years while doubling my income I have effectively reduced my spending on housing by 50% over time. 🙂 I can use these savings to put towards my retirement portfolio so I can reach FI/RE sooner. The same concept can be applied to transportation and gasoline as well. Instead of upgrading to a gas-guzzling luxury SUV, I’m still driving my 10 year old hatchback.
The idea is to keep expenses the same, while increasing income, and investing the difference. 🙂 Of course there are times when it’s appropriate to capitulate to lifestyle inflation. When I start a family I will probably need a larger home and a bigger car. Knowing when to delay gratification, and when to upgrade is a personal decision that everyone is capable of making for themselves in their own way. That’s why personal finance doesn’t start with our money. It actually starts with our personal priorities and values, I think.
Random Useless Fact:
Say what you want about North Korea, but they are better at celebrating Earth Day than any other country.
I hear you don keeping housing costs low. My 15-year mortgage payment is just 13% of my salary – or about half what the infographic states. Add no other debt to the mix and it leaves thousands of dollars per month that I can invest in different ways.
This is why I’m a big advocate of home ownership in the long run. The percentage of income that goes towards housing decreases over time as the principal mortgage is paid off. Meanwhile, renters have to pay more over time due to inflation. 🙂
Personal priorities and values are indeed what count most. We’re a normal income household and still, frugality is a priority in most cases: I cook at home almost on a daily basis (as a result we do pay more for utilities), we rarely eat out, we spend less on clothes and shoes than many would consider “normal”, etc. Right now, saving money is more important than a pair of shoes we’re probably not gonna wear. Just like downsizing meant spending less on housing. But in the future.. who knows how our priorities will change?
My priority changes all the time. I think a lot of my values depend on where I live since certain parts of the world has different kinds of lifestyle influences on people.
Agh, it’s sad that none of this is super shocking. The rich can afford to eat out more, save for retirement, and education. It’s much harder to achieve FIRE (or even just get by) when you have a lower income, since most of the funds are eaten up by non-negotiable expenses, like housing.
Yeah, it’s really hard for lower income households to get ahead. Luckily there’s usually options for people to improve their earnings through hard work, more work, or better education which often doesn’t cost any money.