Your Wealth Myth

by John G. Agno

Published on this site: July 3rd, 2006 - See more articles from this month

The myth: Americans don't need to save because they are wealthier than ever. Just look at the roof over their heads and the cars in their driveways.

Most Americans believe that if they can afford the monthly payments for a house mortgage, the house will appreciate over time and the larger the house, the larger the appreciation. This real estate appreciation belief is one of the main reasons the U.S. savings rate has fallen sharply since the mid-1980s. In fact, last year, it was negative for the first time since 1933.

This may have been true during the recent housing boom with the increased building of McMansions-but it isn't likely to be true over the long run. Since 1975, home price appreciation has been modest, averaging just two percentage points a year above inflation.

Americans don't save in favor of increasing their housing and transportation expenses.

Our housing expenditures have climbed fairly steadily over the past century, and our homes now claim a third of our spending. More families are buying houses, more folks are purchasing second homes, and houses are getting bigger. According to the Census Bureau, over the past 25 years, the number of second homes has jumped 95% and the size of the typical newly constructed single-family home has ballooned 40%.

The number of passenger vehicles has leapt 270% since 1960, far ahead of the 86% increase in the adult population. We now have one vehicle for every adult. Transportation spending jumped sharply in the 1960s and has remained high ever since, accounting for more than 19% of spending in 2002-03.

"The trend has been to buy the most house you can afford, rather than the amount you need," notes Sophie Beckmann, a financial-planning specialist at A.G. Edwards in St. Louis. "It's the same thing with cars. You see a lot more luxury cars on the road. While you can get by with a $20,000 car, people buy the $40,000 vehicle with the leather seats and the TV. There's a lot there that's discretionary."

The bottom line: By reducing what you pay monthly for your houses and cars, you could amass far more wealth by sinking the extra money into your 401(k) plan. This strategy may be critical to fund your retirement years.

Source: The Wall Street Journal, June 21, 2006

John G. Agno, certified executive & business coach Signature, Inc., PO Box 2086, Ann Arbor, MI 48106 Telephone: 734.426.2000 (US Eastern Time Zone) Email: mailto:[email protected] The most critical knowledge is self-knowledge. http://www.MentoringandCoaching.com