Our Precarious Finances

A Balance Sheet Approach to Household Fiscal Health

Our Precarious Finances
January 22, 2016

We hear a lot of pronouncements about the finances of the average American family from a particular angle — wages are rising or falling, debt is either accumulating or easing, retirement and savings accounts are growing or shrinking — but rarely is it all put into the context of a balance sheet, treating the American family as if it were a business.

The Pew Charitable Trusts did just that earlier this year, putting out a report entitled "The Precarious State of Family Balance Sheets." The title is a bit of a giveaway, but according to the report, the balance sheet of the average American household is in grim shape.

The report starts by looking at the separate components of a balance sheet (income, expenses, and assets) and then assessing their interaction to provide a more comprehensive evaluation of household finances. Within each category, the researchers assessed the level of stressed households.

Main Components of the Family Balance Sheet

  • Assets – The report found a disturbing lack of liquid assets. 55% of households were "savings-limited," without available liquid assets to cover one month's income. These households cannot handle any sort of financial shock such as a job loss. As the housing crisis proved, non-liquid assets cannot make up the difference, and sometimes they are the roots of the financial problem.
  • Income – 47% of households are considered "income-constrained," meaning that they spent as much or more than their income over the past year. In essence, if these families had more income, it would be consumed by spending.

  • Debt – 8% of households are "debt-challenged," with at least 41% of gross monthly income going toward debt repayment. That is particularly brutal if your household is also income-constrained, as 29% of households are. These households spend more than they make and are already in serious debt, making it difficult to break the debt cycle.

All three stressors affect an unfortunate 3% of households. A company that has overwhelming debt, spends more than it makes, and has little savings is in big trouble — and households are no different. 70% of all households are suffering from at least one of these household balance sheet stressors.

What is behind the stressors? It's easy to blame irresponsible spending, and that may be part of the problem in some cases. However, costs have continued to rise while inflation-adjusted earnings have stayed relatively flat. Spending increases were in the non-discretionary areas of housing, healthcare, and insurance/pensions. Transportation, food, and entertainment spending suffered as a result.

Assets continue to be a major disconnect for the middle classes, as their wealth is mostly in the non-liquid form of housing. That corresponds to wealth gains shown in the report, where much of the collective gains reported from the 1990s to the mid-2000s were in housing values. After the 2007 crash, most of that wealth gain was erased.

The Great Recession took a toll on spending as well. According to the report, the downturn wiped out twenty years' worth of consumption growth, knocking spending back to 1990 levels. Combine all this with an average income growth of only 2% in the last decade compared to 22% in the previous two decades, and the slow, uneven growth we see in today's economy shouldn't be a surprise to anyone. That's also why wealth inequality is an increasingly hot political topic.

For those who want to dive a little further into the numbers, the full Pew Report may be found at this link. Leave a light on, because if your household falls into one of those economic stress categories, this report makes for some scary reading.

Photo ©iStock.com/OcusFocus

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Steffanie | 01.22.16 @ 15:37
This article makes me feel a little less secure with our savings. Thinking we will have to be a bit better about our budgeting.
irene | 01.22.16 @ 15:38
Great info I think we are doing pretty well but the year is young!
trish | 01.22.16 @ 15:39
It is almost like they wrote this entire article about me...housing market killed us in 2006 so we have been climbing out every since...
Elaine | 01.22.16 @ 15:39
I don't blame everything on over spending, even though that is a big cause, but I also blame the high debt in education and medical bills. That has gotten to be an overload of best weight to try to repay.
Beverly | 01.22.16 @ 15:39
I'm really not surprised by this, most people live beyond their means and on credit. People really need to learn to budget.
Nancy | 01.22.16 @ 15:40
I've always used a spreadsheet type of approach for my budgeting. Always room for improvement though.
Carla | 01.22.16 @ 15:40
We have a lot more than 41% going toward our monthly debt sadly. I hope we can one day get out of this hole. Medical expenses have us drowning right now.
Sara | 01.22.16 @ 15:40
Great info. Man this makes me feel like what went on with the house is actually normal. We have a good few years worth of saving to go.
Erin | 01.22.16 @ 15:40
Those are sobering statements. Hopefully everyone's discretionary spending starts to increase soon so that things are not so shaky in the coming years.
Sarah | 01.22.16 @ 15:41
budgeting is very important. I never understood living beyond your means. how do you even do that? sad state of affairs.
$commenter.renderDisplayableName() | 11.26.20 @ 09:28