Is the Latte Effect Really The Problem?

Shopping malls and retail stores are always packed, and there is a new restaurant on every corner. Everyone seems to be wearing designer shoes, jackets and jeans and sipping $4 lattes. Credit card commercials are constantly promoting splurging and, U.S. consumers have been more than happy comply.

So what's the problem? Why do so many middle class Americans with so much stuff say they feel so squeezed? If they are consumed by debt, isn’t it their own fault? I have always thought that many times we are responsible for the financial situations that we find ourselves in. After doing some reading on the topic I now wonder if our personal needs and consumption choices are really the problem.

Bankruptcy law expert and Harvard University Professor Elizabeth Warren spent a lot of time crunching the consumer spending numbers for her popular books, "The Fragile Middle Class” and “The Two-Income Trap.” In both, she makes this point: Despite all those $200 sneakers you hear about and the long lines at Starbucks, consumers are actually spending less of their income — much less — on discretionary items like clothing, entertainment and food than their parents did. In fact, after taking care of essentials like housing and health care, today’s middle class has about half as much spending money as their parents did in the early 1970s, Warren says.

The basics, our life essentials, now take up close to three-fourths of every family's spending power (it was about 50 percent in 1973), leaving much less left over at the end of the month.
Even though household incomes have risen about 75 percent since 1970, most of that they say, is the result of a second earner, generally a woman, joining the work force. In many cases that added income has been swallowed by rising fixed expenses, such as child care and housing costs, because many people try and buy more house than they can actually afford. The average family now pays at least twice as much for housing compared to what our parents paid in the 1970s.

Four in 10 Americans don't have even one month's worth of savings for use in case of an emergency, according to a survey by HSBC Bank published in 2006. And even with two incomes built into the family budget, the odds of a household getting hit by a layoff have doubled in the last generation. The combination of high housing debt, rising health care costs, lack of savings and greater exposure to unemployment has left many families in a dangerous financial position.

I see the biggest problem being that the largest portion of our budgets are spent on fixed costs like housing, has risen much faster than wages and inflation. That means mortgages, more than lattes, are the source of many of our financial problems.

I now think that the "latte factor" is only being used as a way to distract people from the real changes in the economy.

Roth IRA - - more than just a great retirement investment.

The Roth IRA was first introduced in 1998. Since its introduction, it has become an investment program of choice for a number of our clients because of its versatility.

Like the regular IRA, annual retirement contributions for 2007 to the Roth IRA are $4,000 per person (or $5,000 if you are over age 50) and you have to April 15th to make contributions (Roth IRA contributions are subject to a phase out based on income. You need to be in a qualified income level to contribute).

And, although Roth IRA contributions are not tax-deductible, you may still benefit from the ability to withdraw earnings tax-free.
Here are a few examples of the Roth IRA’s flexibility.

• Saving for college tuition? You can draw on a Roth account to help with your child’s educational expenses, and still retain control of the funds. In addition, if you hold onto your account for at least five years and you’re older than 59 1/2, no taxes would apply on earnings. In fact, contributions can be used at any time, free of taxes and penalties.
• Encourage your youngsters to save. If you have children who have part-time jobs, they too can open a Roth IRA.
• Shopping for your first home? If you’ve had your Roth IRA for at least five years, you can withdraw up to $10,000 ($20,000 for couples) in earnings “tax-free and penalty-free” if you use the money for a “first time home mortgage purchase.”
• Passing on your investments to heirs couldn’t be easier. You can bequeath the funds in Roth IRAs to your beneficiaries, who can withdraw money from the account tax-free over a number of years.
• Roths offer great estate planning advantages. Beneficiaries can withdraw money from a Roth account tax-free. And, unlike regular IRAs, there is no minimum distribution starting at age 70 ½, so seniors with earned income can keep investing in the Roth account at any age.
• If you’re a retiree, you don’t have to worry about being pushed into a higher tax bracket with your Roth distributions, since Roth IRA distributions are tax-free.

Keep in mind that a Roth IRA may not be appropriate for everyone. For example, the IRS requires the owner to hold his/her Roth for 5 years or until age 59 ½ (whichever is later) in order to avoid penalties and taxes on the earnings upon withdrawal. To determine whether a traditional IRA, Roth IRA or other retirement investment program is right for your specific financial goals, contact Mike Pozzi, our Hawthorne Credit Union Investment Adviser at (630) 983-2310.


Securities are offered through Financial Network Investment Corporation, a registered broker/dealer and member of the SIPC. Financial Network Investment Corporation is not an affiliate of Hawthorne Credit Union. Mutual funds, annuities and other investments available through Financial Network Investment Corporation are not insured by the FDIC, NCUSIF or any federal government agency, are not deposits, or obligations of nor guaranteed by Hawthorne Credit Union, or any other affiliated entity. Investments are subject to investment risks including loss of principal invested.

Slow Down to Save Gas

Here's something I didn't realize...from The Daily Green (thedailygreen.org). This site offers tips to going green and some great healthy recipes, too. Subscribe to their daily emaily newsletter! An article appearing in todays' Daily Green newsletter:

Drive 55 (MPH)
On the highway, try not to exceed a speed of 55 miles per hour. Not only are you less likely to get into an accident, but the faster you drive, the more fuel your vehicle consumes per mile. That means more money and more greenhouse gases.

At 65 mph you’re burning 10% more fuel than at 55, according to the American Council for an Energy-Efficient Economy. At 70 you lose 17% of your fuel economy, and at 75 it’s 25%. The numbers get worse from there.

Even though you may thrive off living in the fast lane, if the national speed limit were reset to 55, it would save 1 billion barrels of oil per year — more than the U.S. imports from the Persian Gulf.

The reason why is simple physics. As your engine heats up at higher speeds, it burns gas faster. Plus, all that increasing resistance from air and road drag you down.