American Spending Patterns - Research Paper Example

s Introduction: Spending patterns often vary from individual to individual; however there are always some aspects of spending that are consistent. This consistency is usually found between similar groups of people, e.g. Young College students, young married couples, old retired people, etc. As consumers age, their spending patterns change; this change includes changes in the level of spending and the percentage allocation of spending on different items (US Dept of Labor). These changes are often triggered by major life events, some of these life events include getting a job, getting married, having children or retirement. Our analysis of spending matters should focus on the following groups of American people College Kids Young Married Couples Families with young children Families with teenagers Older couples whose children have moved out Retirees We will also examine the impact hard financial times have had on the spending patterns of Americans. The rising uncertainty and increasing unemployment has likely has a significant impact and we shall analyze its ramifications in the concluding pages of this report to ensure that a broad and all inclusive picture is provided. Reference Person Factor: It is intriguing to note that 26% of the nation’s consumer units have a reference person under the age of 35, and they constitute around 23% of the annual consumer spending. In contrast, households headed by people aged 65 or above constitute only 15 percent of the annual spending despite making up 20% of the total households. Households that are led by individuals aged between 35 and 64 constitute 53 percent of the population and account for 63 percent of the annual consumer spending. College Kids Spending Habits: College spending is influenced significantly by branding (McCullough). Brands are a major part of the conscious and subconscious decision making process of young college kids. This behavior is largely a result of an inclination towards impressing peers and creating a lasting impact. The state of the young American mindset can be summarized by their penchant towards branded jeans, so much so that they are willing to pay $150 for a pair, college women carrying $500 Louis Vutton bags, and men wearing $300 Gucci Belts (McCullough). A large part of this behavior is influenced by the ubiquitous parties that students tend to attend these days. Often, students who spend hundreds of dollars on buying stuff for one party repeat the same for another party the very fnext weekend. The fear that people will recognize previously worn profits, leading to tirades or belittlement leads students to go out of their way to make unnecessary purchases. Shopping is also considered to be a unique form of therapy; students feeling depressed, sad, or indifferent go to shopping to make themselves feel better. This is a unique opportunity for marketers to capitalize on; it’s not that students have the need, they go shopping when they feel like. Other than increasing spending on clothes, students are also more inclined towards spending highly on fast food and latest electronics, including gadgets such as smartphones and tablets. Students, who can afford a car, are also spending their money on them. An important feature of student spending is that they are generally spending more than they earn, according to a survey conducted by Alloy Media and Marketing (McCullough). A significant portion of student spending is done on food, however the remainder is spent on cell phone service, entertainment and clothing. It is safe to say that media and celebrities are influencing student behavior substantially. The desire of becoming as acceptable and cool as celebrities leads students, who can afford to, to buy expensive designer clothes and apparel. TV programs show a lot of luxury lifestyle. There are several reality shows that depict such lifestyles and for anyone who can afford such luxuries, it becomes a necessity. Student spending on fashion and food has led to rising level of debt (Galbraith). College students are also influenced by their peer group when making buying decision. Although the universal inclination of people of this age is towards emulating celebrities, reclusive groups have their own niche needs that they wish to fulfill. Hardworking students are inclined towards acceptable clothing and rudimentary food, but they are not likely to compromise on the originality of the books they purchase or their online student resources subscriptions. Therefore, academic spending becomes a good part of their overall spending. A statistical summary of the student spending behavior suggests that approximately 40% of total student spending is on discretionary items (these include food and clothing), the rest of the expenditure is divided between tuition and fees, room/board, books and supplies, transportation, and other expenditures (ODASSOC). According to Odassoc, this discretionary spending behavior can be explained by the changing demographics of college students. Today less than half of American college students are aged 18-21, whereas the typical college student is in his mid-twenties and has a job and students fluctuate between job and school, leading to taking more than 4 consecutive years to graduate. Young Married Couples Spending Patterns: Americans enter the age 21, facing the prospects of young adulthood. Young adulthood is accompanied by independence and financial autonomy. There is no one to back them up financially and they have to make wise financial decisions to ensure survival. Americans of this age are usually completing their education, entering the workforce and making decisions about their married life. A survey conducted by the Bureau of Labor Statistics sought to investigate spending patterns of young married couples. The survey suggested that young married couples have a per-capita income lower than that of singles of the age group of 27 to 29. Married couples centralize their resources to enable home ownership whereas they spend lower on food, housing, apparel and education than singles (Hawk). Home Ownership and Education: According to the survey, 55 percent of married couples report their own homes while 84% of single individuals are renters (Hawk). The difference of home ownership statistics is smallest for singles and married couples ages 21-23, whereas it is largest for ages 27-29. It is also interesting to note that married CUs are more likely to have a bachelor’s degree than single CUs; consequently single consumer units are more likely to be enrolled in college than married consumer units. For 21-23 year olds, 67% of singles report that they are enrolled in college whereas 46% couples suggest that at least one of the two is enrolled in college. In contrast, for 27-29 year olds, 29% of married couples report at least one person being enrolled in college while 18% of singles report being enrolled in college (Hawk). Analysis: The statistics above suggest that married couples are more inclined towards stabilizing their financial wellbeing, consequently, they compromise on unnecessary spending such as fashion wear, and food and focus on investing in homes. Furthermore, young married couples do not have the financial strength to immediately become home owners, hence there is very little difference between the percentage of young couples owning homes and singles owning homes; however as they grow old they save to invest in homes, leading to a rise in the differential. Although young couples report a lesser percentage of people enrolled in college, when aged 21-23, they continue to be enrolled in college until their late twenties. This can be explained by the fact that they struggle to manage work, studies and personal life, resulting in an extension in the amount of time taken to graduate. Income: The income for married couples is also higher than singles of the same age group. These differences are largest in early twenties and smallest in late twenties. This can be justified by the fact that couples have more to spend, especially if they have children, while singles start to refrain from exorbitant spending on luxury items or clothes etc. It can hence be summarized that young married couples spend a significant portion of their incomes on the following items Home Loans and Mortgages Education Food and Transportation Clothing Others Families with Young Children: An average American family with young children has to cater to several demands. The bread earner of the family has to consider not only his own wellbeing, but that of his wife and children. Hence, spending moves from individualistic luxury items to family oriented patterns, including school expenditures, mortgage loans, student loans, etc. A survey conducted by the department of labor gives us key insights into the spending patterns of American families. From a total income of around $55,000 the American family divides its expenditures into various essentials. A brief explanation of all the components of spending is given below: Housing spending was around $10,023. This is below the per capita housing spending, however it is still a significant part of the overall expenditure. This decreased percentage can be explained by the fact that most couples have a good portion of their mortgage expenditures covered by the time they have children. Pensions and Social Security $ 5027. This portion is aimed towards insuring the longevity and sustainability of the financial situation of the family. Housing, Utilities, Fuel and Public Services $3,477 : Utilities constitute a significant percentage of the average American family spending. These include taxes for public services, fuel and other expenditures. Total Transportation, $6,500: Transportation expenditures rise as a family grows. This figure constitutes both transportation expenditure on vehicles purchased and public transportation expenses. Healthcare , $2,853: Healthcare expenses are high, compared to singles and young adults. These expenses cover those of the young children as well. Other key expenditures include entertainment, food, transportation, gasoline and oil household operations, alcoholic beverages and personal care items. A critical eye of these expenditures suggest that the spending pattern slowly moves from being individualistic to collectivistic family oriented spending which includes schooling expenses, clothing for kids among other things. This is indicated by the high share of household spending. Families with Teenagers: Families having teenagers face several financial challenges. Not only do they have to ensure savings sufficient to finance their education, they also need to pay for the idiosyncratic spending patterns and lavishes of their teen children. Some of the key aspects of family spending with teenagers include: 1) College Tuition and other expenses: Teenagers who are close to entering the college have high demands of tuitions etc. Colleges today are extremely expensive and families need to conjure up a way to manage their finances along with not compromising on the education of their children. Hence families often end up saving and parents compromise on their lavishes and perks, such as an additional car, a highly branded suit or wrist watch, in favor of spending for the education of their children. Along with the tuitions, teenagers are known to become more demanding once they enter college. Their demands rise in terms of the amount of money and time they spent on clothing, food and other excessive things. Their desire to get along the herd and look socially acceptable often results in parents spending a lot of their money on achieving the same for their children. 2) High School Expenses: For young teenagers, the transition from pre-school to high-school is a major life event and they are not willing to compromise on their preparation. High-school is an important stage of any academic career, hence parents seek to identify and post their children in the best high schools available; these high school are very demanding financially and hence parents often end up using a lot of their money to achieve this objective. 3) Entertainment needs of Teens: Teens also place immense important on entertainment items. These entertainment items include video games, CDs and magazines. This form of spending is repetitive as every new movie or video game on offer is demanded by teens, leading to an increase in the overall entertainment expenditure of a family with teens. 4) Clothing: Clothing forms a significant part of spending for any household, but with teens in the house, the percentage jumps highly. Teens purchase clothes regularly, and clothes are a major part of their past, present and future purchases (MediaMark Research). 5) Events and Parties Spending: Prom is considered to be a major life event by teens. They plan it excessively and spend significantly to ensure that their prom night is perfect. American families who have teenagers spend an average of $1078 each on the prom. A rather troubling stat suggested that parents who fell in the lowest income bracket spent more than the country average on prom. Furthermore, 61% of the prom cost is covered by parents whereas teenagers are only willing to cover 19% of the total costs (Prnewswire). A major reason why Prom has gained significance is because it is considered to be a coming of age event. As more and more adults plan to get married late, Prom has replaced weddings, debutante balls and other forms of celebrations as the most important formal occasion of a young man’s life. Kids are highly focused on making a lasting impression, and in a global electronic age, where Facebook and celebrities are a major part of the young adult psyche, children do not want to leave any loose ends when it comes to making themselves look perfect (Malcolm). Empty Nesters Spending Patterns: The typical empty nester is considered to be depressed, lonely and away from family. Having spent the majority of their lives and not having much to look forward to, these individuals have the choice of either living in resignation or making the most out of the stress free years that they have of their life remaining. A survey conducted by Datamonitor suggested that empty nesters are more numerous, wealthy and inclined to spending their money on self-rewarding behavior. Empty nesters constituted a market of around $645 Bn back in 2003 (DATAMONITOR). Some of the key insights given by the report are explained below. Age Defines Spending Patterns: The age of empty nesters defines their spending patterns. Early empty nesters, aged between 50 and 64, have high disposable incomes. They tend to spend lavishly on self-rewarding behavior and are willing to go beyond what they may have considered unaffordable during their prime time. Late empty nesters, aged 65 or above, face more budget constraints, and hence their focus is more on value for money items. Their consumer packaged goods spending is limited whereas they save a significant amount for special occasion purposes. Impact of Proper Planning and Increasing Incomes: The immense increase in empty nester spending is partly a result of rising incomes, and partly a result of planning a more self-rewarding retirement. Empty nesters have to take care of only themselves, and hence can afford lavishes and perks that no one burdened with the responsibility of families can enjoy. Consumer Packaged Goods form a key portion of the total spending of empty nesters. Increased Socializing: Empty nesters go through an increase in socializing with their age. They engage in entertaining at home activities 26 million times a year in the United States. Furthermore, they are likely to form better bonds and relationships with other empty nesters, leading to more knowledge of CPG products and greater purchases (DATAMONITOR). Therefore, a careful assessment of the empty nesters market can lead to several competitive advantages for CPG product marketing firms. They can understand how to profit from this ever spending group, they can examine the transitions that empty nesters face and win customer loyalty, resulting in greater sales. They can also do product development aimed to cater to the needs of the empty nesters they are engaging with. Empty nesters are also known to spend on pets. The household spending on children is superseded by spending on pets (Campbell). Retirees and Old People: Marketers and organizations are increasingly interested in older people due to their rising percentage in the US population. According to projections by the US bureau of statistics, one in every five Americans will be over the age of 65 by 2040. The source of income of these individuals is different from that of younger adults. Wages and salaries constitute 29.3% of income for people aged 65, but only 9.3% for people aged 75 or above whereas social security, pension, railroad and government retirement constitutes 52.7 and 63 percent for adults aged above 65 and 75 respectively. This suggests that these people are aware of what they will be receiving for the remainder of their life and can decide where to spend accordingly (US Bureua of Statistics). Adults aged 65-74 spend a lot more on housing than those aged above 75 ( 22% more in absolute terms), however housing expenditures accounted for a greater percentage of the older group’s total expenditure. This suggests that the total spending decreases as individuals age. Furthermore, the average expenditure on owned dwellings was more than one-third higher for people aged 65-74 compared to people aged more than 75. This can be attributed to the fact that this age group still has a higher level of home ownership and a higher percentage of consumer units still paying on their mortgages in the younger groups; 76% of those aged between 65-74 owned their homes compared to 67% people aged 75 above. However, only 8% of the older group owed mortgage payments compared to 33% of the first group. This suggests that the first group has several fixed payments to consider before deciding its discretionary expenditures. The first group also owed more property taxes than the older group (33% more). Transportation expenditures for the group aged 65-74 was a high 19% compared to 13% for the older group. However, healthcare expenditures saw an increase with an increase in age as the total healthcare expenditure constituted 13.3% for adults aged 75 and above compared to a lowly 8.8% for people aged 65-74. It is interesting to note that apparel expenditures also decreased with age, the first group spending 4.5% on apparel compared to 3.1% spent by the older group. Other key expenditures included food, which was almost equal for both groups at around 13%, entertainment and reading, personal insurance and pensions and other expenditures. This market poses good opportunities for marketers, however, they need to understand the varying trends of spending to firmly capitalize on this market. Products targeted at people aged 60 should cater to that specific age group only and a generalized one product for all old people may not work well at all (Harrison). The Impact of Hard Financial Times on US Spending: The slowdown in the economy has led to a decrease in discretionary and luxury spending by US households. There is a decrease in spending on designer clothes, and other lavish fabrics post economic crisis. Furthermore, the trend of eating out is also falling as a result of testing times. The average annual consumer spending per unit fell by 3.1% from 2007 to 2010, suggesting that consumers are facing tough times and making discretionary decisions with regards to what forms of spending to be compromised. Average prices of products have risen by 5.2%, as a result of spiraling production costs and decreasing economies of scales. Hence the real consumer spending has decreased by an alarming 8%. The economic slowdown has led to consumers tightening spending and while all elements of spending have been impacted, the impact on women clothes has fallen slower than that on male clothes. The economic challenges have proved to be blessing in disguise when it comes to overall impact on health. The data suggests that real spending on tobacco products has fell by a huge 23%, partly due to stringer economic challenges, and partly due to the 46% rise in nicotine prices from 2007 to 2010. Furthermore, spending on sugar and sweets has fallen by 6.5% whereas spending on fruit and vegetables has increased by 9% leading to a healthier spending pattern. Processed vegetables have seen an increase of 29% over the three years, whereas food away from home has decreased by a significant 14%. During the strong economic times of 2003-2006, Americans tended to party more and spend on lavishes, leading to an increase in Alcohol spending by 19% and cushions spending by 13%. The tough economic period of 2007-2010 led to a fall in spending on these items by 16%. Spending on gasoline and motor oil also fell by 11%, partly due to fluctuating prices also. Household furnishing and other lavish expenditures took a hit of around 18% during these three years. The tough times, thankfully, did not impact education negatively as Americans continued to invest in academics. Spending on education saw a rise of 13% despite increasing financial constraints. Nominal spending on healthcare also increased as Americans reallocated the money they saved from avoiding lavishes to the essentials of life, including education and healthcare. Healthcare spending saw a rise of 11%. The auto industry was badly hit by tough financial times and this is depicted by the spending patterns of common Americans during 2007-2010. A real decrease of around 25% was seen in consumer spending on new cars and trucks. This was complemented by a real increase of around 2.5% on car maintenance and repairs, suggesting that Americans were largely satisfied by what they had and postponed or cancelled any plans of upgrading their vehicles to better economic times (Economist). The Way Forward: The US Economy is a consumer driven economy, however experts argue that consumer spending may not act as the engine of growth any more as it used to be in the past. Consumer spending accounts for a majority of spending in all developed nations, in the US, however, the share of consumer spending was relatively high compared to other countries (Emmons). The financial crisis that hit American consumers badly from 2007 to 2010 has led to decreased spending and more discretion. The amount of dependence of the US economy on consumer spending is dangerous and with the level of discretion among consumers increasing, it is essential that the United States finds other ways to trigger demand. This can include forming closer economic ties with other countries to sustain the local economy. Marketers face a unique challenge in these tough times. The local consumers are no more willing to accept unnecessary products and form them a part of their lives (Bostick). This calls for a high level of innovation and creativity in both the marketing and product development front for organizations. The US economy is largely a consumer driven economy and hence marketers and consumer goods manufacturers have a major role to play in order to ensure the survival and growth of our economy. Works Cited Bostick, Nan. Consumer Spending. Saddleback, 2003. Campbell, Anita. Top Ten U.S. Spending Trends. 17 2 2006. . DATAMONITOR. "Empty Nestrs - Targeting High Spending Customers." 2004. Economist. Hard Times. 25 10 2011. . Emmons, Williams R. Don't Expect Consumer Spending To Be the Engine of Economic Growth It Once Was. 1 2012. . Galbraith, John Kennet. The Affluent Society. Houghton Mifflin, 1998. Harrison, Beth. "Spending patterns of older persons revealed in expenditure Survey." US Bos (n.d.). Hawk, William. "Household spending by single persons and married couples in their twenties, a comparison." 2011. Malcolm, Hadley. Prom spending rises to average $1,078 this year, survey says. 12 4 2012. . McCullough, Crystal. Student spending habits, debt are on the increase. 5 12 2009. . MediaMark Research. "Teen Market Profile." 2003. ODASSOC. "College Student Spending Behavior." 2004. Prnewswire. Visa Survey: Prom Spending Surges 33% Nationwide. 2012. . US Bureua of Statistics. "US BoS Comsumer Expenditure Survey." 2011. US Dept of Labor. "Bureau of Labor Statistics ." Issues in Labor Statistics 8 2000. Read More