Broke, like the Joneses

WE’VE got enough money worries at home. Then we leave the house, and the show begins. The acting. The cover-ups. The secret sizing-up of others. How are they doing so well?

We can’t figure it out because almost nobody talks honestly about money. To make sure we’re keeping up, though, we gather clues, make assumptions, try to piece it together. That’s where we go wrong. What we’re really doing is living a big financial fiction.

I’ve been digging around for the last two years to find out the truth about Americans’ finances -- and why we can’t stop thinking about other people’s money. I got interested in this when my husband wasn’t working and we were stressing out over money (all the while telling others that things were “good!”). What made it really bad was the head game. We convinced ourselves that “everyone else” had it so much better. A young couple moved in next door, and we heard they’d paid cash. They renovated. The woman had an incredible wardrobe. And she stopped working to have kids. It all seemed so easy for them.

We should mind our own business, of course. But let’s face it, it’s the American way to notice those who are better off than we are and to want what they have. (Otherwise, how would we keep our standard of living so high and always getting higher?)

My investigation started with our next-door neighbors. Surprisingly, when I asked, they told. They did have a mortgage after all. The renovations? Home equity line of credit. Her Marc Jacobs clothing? Credit card. And the distressing $21,000 balance had been kept secret from her husband. This was none of my business, but ... it made me feel better.

Next, I sat down with a suburban family from working-class backgrounds who moved into a gated community. They got swept up in the country club lifestyle, nights out on the town, ski trips, beach weekends. Soon they’d gone through their savings, their house was leveraged to the max and they owed $100,000 on credit cards. When they had tapped every scrap of credit and couldn’t make it another month, they declared bankruptcy -- and lived in fear of anyone finding out.

Had they ever wondered if others, too, were living beyond their means? “No,” the husband said, “I really assumed everyone could afford it easily, and even began to wonder why it was so hard for us.”

But “everyone else” cannot actually afford it. For every two couples who have gotten divorced in recent years, three families have gone bankrupt. And a lot more are struggling. Twenty-five years ago, American families were saving 11% of their income. Now the average savings rate is below zero, which means we’ve gone into debt to spend more than we make. A 2005 report from the Federal Reserve titled “Spendthrift Nation” points out that we now have “record-setting levels of household debt relative to income.” Lifestyles have improved -- but at a price we can’t actually afford. The Fed says that, as of April, we owed $807 billion on our credit cards -- an average of $7,600 per U.S. household. Some of that has to belong to families just like ours.

In a recent survey, 78% of respondents said their debts were “making their home life unhappy.” Yet we rarely hear such confessions from those we know. As for home equity, our homes are worth a lot (we’re rich!), but we own less of them than ever before (uh-oh.) By spending the equity, we have essentially purchased more expensive homes without moving -- and very possibly without earning any more income to repay the loan. Home equity loans have traditionally been used for home improvement, which increases property value. But in recent years, the Federal Reserve confirms, we’ve borrowed against our homes for lifestyle boosters such as vacations. When I’m on vacation (using my husband’s Sheraton points from work), I look around and assume everyone else is earning enough to afford to be there. But I guess not. Again, appearances are deceiving.

Another fiction is thinking that those who really do have more are content. They’re not. It’s hard enough to manage our finances. Managing expectations, keeping up appearances, trying to measure up, all make it harder. What we need are reality checks. Honesty. That’s how we can catch up with the Joneses for good.