In the Hole

About a month ago, a friend and I are having lunch. I’ve known the guy for years. Somehow we get to talking about finances, at which point he confesses: “Most of my working life, I’ve spent about 103 percent of my income each year.”

“Oh?” I say, trying not to sound too surprised. And he says, “Thank goodness for the real estate market. Every few years, we refinance our house and take out some equity. That has kept us going.”

Here’s the clincher: My friend makes well over $200,000 a year.

But here’s the other clincher: He’s far, far, far from alone. According to a November 2005 A. C. Nielsen semiannual Online Consumer Confidence Study, about one in five Americans—22 percent—have no money left once they’ve paid for essential living expenses and done their discretionary spending. That puts the United States at the top of a list of 42 countries for saving futility. We’re tied for first with Portugal.

Others near the top include Canada, number three with 19 percent of its respondents tapped out, the United Kingdom, number four with 17 percent, and France, number five with 16 percent. Now get this: According to a similar Nielsen survey in May 2005, only 5 percent of respondents in Thailand were not able to save money.

And for Americans, that 22 percent figure is actually good news. In May 2005, of those surveyed, 28 percent had nothing left at the end of the month.

The U.S. savings rate in 2005 sank to negative 0.5 percent, or $42 billion, the first time the savings rate was negative since the Great Depression. This is a key economic indicator, because it shows how vulnerable households are to a sudden economic shock, such as a surge in interest rates or an unexpected expense.

This brings us back to my friend, who said he was fully aware that the fast-appreciating value of his house was his savings plan. But evidence is mounting that that particular gravy train is running out of steam as loan-to-value ratios climb.

The Nielsen study asked folks whether they were concerned about all this. The answer appears to be increasingly “yes,” and that’s a good thing. Now, 42 percent of Americans, versus 33 percent in Nielsen’s October 2004 survey, list debt repayment as their first priority for spare cash. Nielsen reports that 66 percent of those surveyed said they have cut down on take-away meals, 61 percent have turned down the thermostat to save on gas and electricity, 61 percent have cut back on out-of-home entertainment, 54 percent are buying fewer new clothes, and 47 percent do less driving.