Tough Economic Times Molding Tough Consumers
Philip Moeller

 

Americans are learning how to squeeze a dollar

Jacqueline Konwinski makes no claims to financial perfection. But in virtually every major area of the life she shares with her husband, Jim, the Konwinskis have done the right thing. Jackie, 66, and Jim, 67, both started working when they were 12. They have made and lived within budgets. They bought a home in Sylvania, Ohio, a western suburb of Toledo. Their only child, a son with developmental disabilities who is now 39, lives with them. Jim had worked as an industrial designer, but his job was downsized in the late 1980s, and he worked sporadically for the next decade until serious health issues forced him to retire. "We saved and invested for, I'd say, about 35 years," Jackie says. "We kept our cars for a long time. We didn't take many expensive trips, so we would be able to save and invest. We believed that we were responsible for ourselves."

So it was that in the fall of 2007, Jackie decided she would be able to retire in 2008 after spending more than 30 years as a teacher of high school history, government, and economics. With about $450,000 in investments and a paid-off home worth about $200,000, the Konwinskis felt comfortable that they would be able to cover a lot of their expenses with Social Security, use their nest egg to enjoy life a bit, and still be able to leave something behind to support their son. When she retired in June 2008, Jackie says, "it looked like we could do things like remodel the house and take vacations, and the quality of our life would be good."

But, of course, it didn't turn out that way. Plummeting investment values decimated the Konwinskis' savings. Their carefully crafted plans amounted to nothing, and their reward for years of meticulous planning turned to dust. Millions of Americans have stories like Jackie Konwinski's. More than 3 million individuals and families sought credit counseling in 2009, swamping available resources, according to the National Foundation for Credit Counseling. U.S. News spoke with consumers, financial advisers, credit counselors, economists, and other experts throughout the country. While they all say that things are slowly getting better, they also believe that the consumer landscape of the United States is the financial equivalent of New Orleans after Hurricane Katrina.

Smart moves.

Those who have lost jobs, homes, and dreams will never look at things the same way again. Like the generation that survived the Great Depression, these people will forever reflect new attitudes toward money, investments, risk, and their own financial security.

Consumers have been forced to become financially resourceful.

They appreciate the value of a dollar as never before and have found imaginative ways to stretch their money. Budgeting is in; credit cards are out. Perhaps more important, many Americans have discovered that the quality of their lives does not need to be measured in material goods. People who have hit the financial rocks for the first time find themselves emerging on the other side with new appreciation for family, friends, and sunrises.

That includes Jackie Konwinski.

"We had enough money to pay for things like utilities, groceries, and small entertainments," she recalls. "But when it came to things like property taxes and premiums on long-term-care policies, that's where we ran into trouble. And our dilemma was, where do we get the money? If we take it out of our investments, we will have to sell them at a loss. So I would sit here at my desk and calculate which investment would have the smallest loss. And after a long period of thought, we decided not to sell our investments." Instead, the Konwinskis went to their bank and locked in a low interest rate on a line of credit, using their home as collateral. Today, they're $30,000 in debt, although their investments have recovered some of their losses.

Ironies abound, Jackie notes, as do wrenching conversations and decisions. They saved money by dropping Jim's long-term-care policy, reasoning that the odds favor him dying well before Jackie. The government's "cash for clunkers" program seemed heaven sent. The Konwinskis had gotten rid of their second car several years ago to save money. Their remaining car, now 18 years old, needed replacing. But in part because of their frugal ways, Jackie says, their car was too fuel-efficient to qualify for the program. So they were forced to tap their line of credit to buy a Honda. A used Honda.

The Konwinskis save a lot of money with just one car, and it forces them to plan outings, which in turn leads to well-thought-out shopping lists and more savings. Many consumers interviewed agreed that cutting back on their driving and considering other transportation options have been a big source of savings. They also said that careful planning had replaced spontaneity in their spending habits and that while they have given up some consumption-driven pleasures, they are able to spend a lot less money without sacrificing their standard of living.

Americans spend between 60 and 70 percent of their money on housing, transportation, and food (chart, Page 22), so this is where the newly frugal look to shave expenses. Entertainment, tobacco, alcohol, and other discretionary items account for a large chunk of consumer spending -- and this, too, becomes a target for savings.

The Konwinskis were forced to reshape their buying patterns because of the shrinking value of their investments. For many others, the trigger was job loss or the need to help other family members who had lost income. For Karl Baldwin, 52, tougher times came in the form of his wife's loss of most of her part-time income, his mother's increasing frailty, and his 30-year-old son's need to move back home because he couldn't earn enough to support himself. Baldwin, a civilian engineer who has worked at the Army's Picatinny Arsenal in New Jersey for more than 26 years, has seen his own income stagnate.

Never wealthy, the Baldwins have an extensive list of money-saving strategies.

And they've been forced to sacrifice long-term benefits in the interest of meeting short-term budget needs. For example, they have lived in the same rented house for 30 years, long ago abandoning their rent-to-buy plans. Baldwin has a retirement plan but can't afford to set much aside. "You go with what you can afford," he says. Years earlier, the Baldwins decided to buy three of the same car model, in part because they could cannibalize them as needed to keep the other cars running. Their minivans are now more than 12 years old; one of them broke down and is being used to provide parts so the other two can stay on the road. Baldwin does many of the repairs himself.

Cutting back.

Downsizing has become a way of life: bulk purchases of groceries, deferred maintenance on their home, cutting back to basic cable TV, no vacations, and a paycheck-to-paycheck life. Baldwin's mother lives about 200 miles away, and he visits her regularly. His own health is suffering, he says, but there is simply not enough money for all the medical care he needs.

"We put off things that weren't essential," he says. "We used to go down to Atlantic City two or three times a year -- not to gamble but to enjoy things there you can do for free. We haven't been there in two years." An amateur military historian, he has borrowed lessons from the rationing of World War II, including using meatless recipes from old rationing books. "It's a 'when you don't have it, you don't miss it' sort of thing," he explains. "Basically, all the aspirations and everything have sort of gone on hold for the duration. We do look forward to retiring and getting old together. Our coping skills are just to never give up."

For many consumers, a loss of income came when they were already extended on credit cards, triggering a cascade of problems.

Laurie Ferrer, 42, got her nursing degree in 1991 and is now a pediatrics manager for a St. Louis medical center. Her husband of nearly 15 years, Carlos, did chemical testing work, and the couple had their first child in 1997. More children followed, and Laurie went back to school to get a master's degree. At the end of 2005, Laurie's husband was laid off. In early 2006, she found herself pregnant with their fourth child, owing $40,000 in education loans and $44,000 in credit card debt on 30 different credit cards. Although Carlos found another job in 2006, the Ferrers were drowning in monthly credit card bills of $5,000. Their child was born at the end of November.

"The baby was jaundiced, and we lost power at home because of a bad storm," Laurie Ferrer recalls. "The doctors said we should stay in a hotel until the power went back on, but we couldn't afford it. Christmas that year was rock bottom. There was no Christmas. There was no food. There were no toys. There was nothing." By her own admission, Ferrer had been a superconsumer. Restaurants, vacations, and shopping sprees were standard. "We would go to visit people at the drop of a hat," she recalls. "We had no savings, but we had credit cards, so we'd just go. Every year, I'd buy a Coach purse, and I wasn't getting the little ones; I was getting the big ones. Everything for the kids had to be a brand name from a designer. There was no generic-brand food in our house."

Ferrer was led by a friend to contact the local office of ClearPoint Credit Counseling Solutions, a national nonprofit. Much like an alcoholic going cold turkey, she was forced to adopt a cash-only consumption lifestyle. Her credit card debts were reduced and consolidated with ClearPoint's help and the support of her creditors, who would rather get paid something than nothing.

The money she was formerly paying in interest charges is now paying down her balances. And Ferrer has transferred her enthusiasm for spending into an equally outsize love of saving. She's buying smart, buying generic, buying used, and often not buying at all. "You need to learn that it's OK to ask for help. Once you take that first step, it all starts to come together," Ferrer says. "I did everything my counselor told me to do," she recalls, including drawing up a new household budget, paying for everything in cash, and putting her credit cards away. "If you use the credit cards while you're on the program, they will kick you off. It's a little 'tough love,' but I needed it."

By May 2007, Ferrer had pared her debt by $5,000. She expects to be free of credit card debt in two years. In six years, her home will be paid for. She does nursing work on weekends to earn extra money and sells Avon cosmetics. Carlos is back in school working toward a degree in electrical engineering.

"Your budget has to be on your mind every day when you leave home," she says. "Being able to sit back and enjoy the little things is special. You don't have to spend money to sit down and read with your kids, or play board games. . . . I'm a better cook, and I think I'm a better person. There's nothing like eating a big old piece of humble pie."

How Americans Spend Their Money

Here's a breakdown of the average annual expenditures per U.S. household.

Housing and related purchases 33.9%

Entertainment and miscellaneous items 19.4%

Transportation 17.0%

Food 12.7%

Personal insurance and pensions 11.1%

Healthcare 5.9%

Source: U.S. Bureau of Labor Statistics, 2008 Consumer Expenditure Survey

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Tough Economic Times Molding Tough Consumers | Philip Moeller

 

(c) 2010 Philip Moeller