
Households without any cash savings are twice as likely to be wealthy as poor - jseliger
http://www.theatlantic.com/business/archive/2014/03/are-the-suburbs-making-people-live-paycheck-to-paycheck/284586/
======
jdietrich
The analysis misses the crucial factor - access to credit.

A middle-class homeowner can easily borrow tens of thousands of dollars
cheaply and easily via credit cards and overdrafts. With a good credit
history, you don't need liquid savings to deal with a temporary cashflow
problem; Low interest rates mean that it is economically rational to rely on
credit in this way, rather than having capital under-utilised in instant
access savings accounts.

Credit is vastly more expensive for the poor, especially the unbanked poor
(who represent around 8% of the American population). Borrowing $1000 for a
couple of months costs just a few dollars if you have a low-rate credit card,
but hundreds if your only access to credit is through payday lending. Without
the cushion of cheap credit, it is imperative to have a rainy-day fund.

The availability of peer support is also highly relevant; If you have affluent
family and friends, then the consequences of cashflow problems are greatly
diminished.

The author draws the conclusion that the middle-classes are financially
insecure, but I think that the converse is true - they choose to spend to the
limit of their income because they are highly financially secure and do not
fear short-term cashflow problems.

~~~
ghaff
Credit cards aren't necessarily the best example as they carry horrendous
interest rates relative to just about everything else in today's market. That
said, they can paper over a very short-term cash flow crunch easily without
costing too much. And, as you say, there are often many other sources of
credit such as family, HELOCs, etc.

That said:

>they choose to spend to the limit of their income

I'd argue that this is generally not a good idea unless "spend to the limit"
includes a budget for savings.

------
patio11
Partly this is due to households who are financially well-situated having
options for smoothing out transient cashflow issues which are superior to
keeping large amounts of cash in non-productive accounts. Depending on your
risk tolerance, if you're a millionaire, having $1k in checking might not be
quite as insane as people writing personal finance advice for Americans with
$30k annual incomes would make it out to be. (Most folks with $30k annual
incomes don't have $100k available on plastic or the ability to have $30k
wired from their brokerage to checking within an hour of asking for it.)

~~~
muzz
this may be a nit, but unless the $30k is in a cash-equivalent like money
market wouldn't you have to wait 3 days for settlement of whatever was sold
for that $30k?

~~~
patio11
It depends on a bunch of factors. For the type of folks I'm imagining, that
won't be a problem for them. Think "margin." Not only do they not need to wait
3 days to receive the $30k they might never have to sell anything for it at
all.

------
IanDrake
This article refers to two classes of people, the "middle class" and the
"poor". It then goes on to categorize the middle class group as "wealthy".

It's as if words no longer have meaning. Wealthy means you can live off your
wealth.

------
ChuckMcM
I was sad that they didn't consider the fact that people save or don't save
often as a function of their experience growing up. I remember finding
vegetables that my wife's grandparents has canned in jars "for later" from the
60's in their basement. They were _savers_ , they had lived through the Great
Depression.

Then there were people for whom their whole life the folks that gave them
money, their parents or their employers, were always there for them to give
them more when they needed it, they haven't saved _anything_. A lot of them
got caught out when the Great Recession hit.

Are their children and people who lived through that more inclined to save
again? Hard to say, but it seems like it isn't really relevant to compare the
savings behavior of a 40 year old to that of a 20 year old. They had
completely different life experiences. And when the 40 year old was 20 it was
a different experience than the 20 year old is currently experiencing. As so
much of our behavior is driven by our past experience, this sort of cross
generational behavior comparison analysis totally falls flat for me.

------
brownbat
Article calls out an interesting point by Elizabeth Warren.[1] In this
country, it's extremely difficult to access the best schools without expensive
housing. That encourages families to overextend and puts them at risk of
bankruptcy.

There was a recent This American Life episode that demonstrated the human
impact of our absurd system, where hyperlocal property taxes set school
quality. I thought it was a particularly strong episode.[2]

[1] The Two Income Trap, [http://www.amazon.com/The-Two-Income-Trap-Middle-
Class-Paren...](http://www.amazon.com/The-Two-Income-Trap-Middle-Class-
Parents/dp/0465090907) [2] This American Life #512, "House Rules"
[http://www.thisamericanlife.org/radio-
archives/episode/512/h...](http://www.thisamericanlife.org/radio-
archives/episode/512/house-rules)

~~~
HarryHirsch
_There was a recent This American Life episode that demonstrated the human
impact of our absurd system, where hyperlocal property taxes set school
quality. I thought it was a particularly strong episode._

Oh yes. I remember my favorite bartender who after a divorce kept herself
afloat working part-time retail and tending bar. There aren't many
alternatives in nowhere rustbelt America. She rented an apartment that was in
the only decent school district in town, all other schools were quite like
juvie hall. About 75 % of her income must have gone to rent. When her youngest
son had finished school she moved.

I cannot fault this decision, education is important, and when you are near
minimum wage a support system is important. Moving to where the jobs are isn't
the panacea it's made out to be on this website.

------
Malarkey73
This article is ass backwards. It implies that the upper middle classes are
poor because they don't keep cash savings.

But what it actually suggests is that the middle classes are putting their
money into property and investments - which is indeed a rational choice that
will make their excess wealth work for them.

Not that I'm saying the middle classes aren't being squeezed - by the 1%
stretching off into the distance. But this is just not that.

~~~
dgabriel
Sure, but in the case of job loss + foreclosure or short sale, all of that
goes up in smoke. It's a big risk.

~~~
nawitus
I wonder why one can't sell a house for about 95% of the market value in a
month. I mean it sounds like a good deal: the property owner can sell the
property quickly to pay off the mortgage, while keeping some of the savings
for himself. The real estate investor will make 5% of the value of the house
in a few months (minus expenses).

~~~
drinkzima
Transaction costs on housing hover around 5-6% generally, and that ignores
holding costs. Housing isn't an 'economically perfect' marketplace.

~~~
nawitus
Fair point. Transaction costs for the seller where I live apparently only
include the estate agent commission, which can be 3% or even a fixed amount
(e.g. 3k€).

------
wmt
Home ownership and kids were the thing for me. While studying I was netting
800€ a month in a 400€ rental apartment and never had worry about money, and
had a decent buffer in the bank. Now working and having a 2 + 2 sized family,
we net 5000€ month, and pay 1500€ a month for the house (loan + other costs),
and and still we have to very carefully budget our every month, often running
on fumes when a payday arrives.

(I have no regrets, this was more of an observation.)

------
kens
I read over the referenced Brookings paper and I can't make any sense of it.
The paper doesn't really define what they mean by "wealthy" and "poor" (which
is a red flag). It seems like they define "wealthy" as having a nonzero amount
of illiquid assets, and "poor" as having a zero amount of illiquid assets.
This is crazy - if you have one dollar in home equity, you are wealthy by this
definition.

The paper's main conclusion is that 1/3 of people living hand-to-mouth [hand-
to-mouth is the paper's term for having no liquid assets] are poor, and 2/3 of
them are wealthy. But I couldn't find any data on what fraction of the
population is "poor" and what fraction is "wealthy", which makes it impossible
to interpret this result. Are "wealthy" people more or less likely to live
hand-to-mouth than "poor" people? I couldn't figure that out from the paper.

The Atlantic article also seems to be totally wrong in interpreting the paper,
saying the "wealthy" have at least $50,000 in illiquid assets. The paper,
however, says "the [wealthy hand-to-mouth households] typically hold sizable
amounts of illiquid wealth: for example, the median at age 40 is around
$50,000." Confusing the minimum amount of wealth with the median amount of
wealth is a huge, huge error that totally changes the meaning.

If anyone could figure out what this paper is really saying, I'd like to know
(not sarcasm).

Link to paper:
[http://www.brookings.edu/~/media/projects/bpea/spring%202014...](http://www.brookings.edu/~/media/projects/bpea/spring%202014/2014a_kaplan.pdf)

~~~
jpmattia
Warning: Cynical poster alert. Modern economics is inextricably entwined with
politics. Look at the last line of the conclusion:

> _Second, we showed that the model that allows for W-HtM behavior implies
> that to maximize the aggregate consumption response to scal stimulus
> payments, the payments should feature more moderate phasing out with
> household income._

During the economic shock of 2008, there was a fiscal response applied that
was pretty much formulated in the wake of the depression: Give money to folks
who are very poor (unemployment, welfare, foodstamps), who will then boost the
economy a bit because they will not save/hoard the money or go tie up wealth
in long-term assets.

The current paper is pointing out: "Hey, there are wealthy people living hand-
to-mouth. If you give money (= "fiscal stimulus") to them, you will achieve a
boost in the economy as well."

Who knows, maybe the conclusion is right. But god knows how you'd achieve any
confidence that the conclusion wasn't a function of the authors' funding.

~~~
gohrt
This is explains all the counter-intuitive formulations and statistical errors
in the paper; thank you for highlighting it.

Really, though, this sort of thing happens _every_ _single_ _time_ an
_Atlantic_ story is posted.

------
ilamont
Misleading choice of words in the headline and text. A teacher making $60k a
year is "wealthy" by The Atlantic's definition.

~~~
walshemj
Well it depends if that teacher had inherited a property and some income
producing assets from a parent or grand parent and have a pension from a
former job (say 20 years in the army). They could be very well be wealthy.

------
cbhl
> _Most poor hand-to-mouth people (the red line) are younger, peaking around
> 22 years old_

Gee, I would be tempted to attribute this to many people graduating from
college/university around the age of 22...

------
crazy1van
The title for this article is "Are the Suburbs Making People Live Paycheck to
Paycheck?".

However, the article isn't about suburbs at all. It is about the financial
implications of home ownership. Home ownership maybe relegated to suburbs in
NYC, but in a large number of cities that is not the case.

------
nwenzel
Possibly the "wealthy" appear to be living hand to mouth intentionally.
Inflation is a highly regressive tax on cash and savings that rewards
hard/real assets.

Buying the most expensive house you can (barely) afford is a wealth building
strategy. It's not without risk, but you have inflation on your side. Sitting
on cash to save up for that down payment is an uphill fight against inflation.

As a parent of a 3.5 and 1 year old, I'm definitely a believer that our public
schools are de facto private institutions. You pay your tuition one way or
another for a premium product.

~~~
JoeAltmaier
I'm not so sure there is such a thing as a premium product. Home schooling
outcomes can beat public schools by a large margin (don't always, but can).
There's so much room for improvement, I'm not sure I want to spend ANY extra
money on a particular public school.

------
supercanuck
I have access to 12 months of 0% interest up to about $10-15K with a fee of
about 3%, $300-500 total due to my credit score.

I think the access to Credit allows people to live paycheck to paycheck.

------
mikeash
No discussion of the proportion between poor and non-poor overall?

If you pick a household at random, you're 3x as likely to get a household with
over $50,000 in net worth (their cutoff) as you are to get a household with
less.

According to this article, if you pick a household with no cash savings at
random, that drops to 2x.

Thus, households with over $50,000 in net worth are much more likely to have
cash savings. In other words, _no shit_.

------
fulafel
Rich counties are also more indebted as percentage of GDP than poor countries.
If you're well off people will lend to you and it makes sense for you to
leverage. Classic correlation vs causation.

[https://en.wikipedia.org/wiki/List_of_countries_by_public_de...](https://en.wikipedia.org/wiki/List_of_countries_by_public_debt)

------
nwenzel
Friendly reminder... Label your axis people! Especially if you're using them
as evidence to prove your point. Though, due to the image quality, I'm
wondering if these images were actually taken from the original study rather
than produced by The Atlantic.

------
a3voices
The world "wealthy" in my opinion means you can live the rest of your life in
comfort without working, if you choose. These people are not wealthy.

~~~
this_user
There is more than one definition of "wealth" and "poverty". You could be a
senior Silicon Valley engineer making 200k a year and that would make you
wealthy compared to some homeless person in Detroit, but you'd still be poor
compared to a hedge fund manager in NYC making 500 million.

~~~
a3voices
Well on a logarithmic scale, 200k is much closer to 500m than it is to 0.

~~~
guard-of-terra
On a logarithmic scale you don't get close to 0 no matter how hard you try.
It's infinitely far away isn't it?

~~~
pizza
0.001 dollars is essentially 0, isn't it?

