Don’t Miss Out, You’ll Regret It (Part 7)

Key Points

  • Housing, education, and healthcare costs continue to rise year after year.
  • The rise in these three categories of spending have outpaced other categories for many decades.
  • If this trend were to continue unabated, almost all household income will eventually end up going into these three buckets alone.
  • This path is unsustainable on many levels. Yet, for now there are government programs out there that can help soften the blow. Not ideal, but better than nothing.

Housing can be affordable or a good investment, but not both. In fact, the same goes for any investment. Let’s take some time to explore the long-term implication of this notion, and see where it takes us.

In the Past

We have discussed the notion that prices rise over time due to inflation, and we’ve also discussed the notion that a common measure for inflation is CPI, which has a long-term average of about 2% a year. This means that if something cost $100 last year, the same item would cost $102 this year. No big deal if your wages also increase by CPI, and even better if your wages increase at a rate higher than CPI.

But what happens when common household expenditures consistently increase at a rate much higher than CPI? As it turns out, this phenomenon is exactly what has been happening to three of the largest categories of spending that Americans face. Essentially, the cost of housing, healthcare, and education all have been increasing at a higher rate than CPI for decades. Uh oh.

“The Boomer generation needed just 306 hours of minimum wage work to pay for four years of public college. Millennials need 4,459.” – Bernie Sanders

In the chart below, we see a similar phenomenon occurring in health care. In 1970, the United States spend about 7% of its GDP on health care. But by 2017, this had increased to about 18%. By similar factors, education and housing have also increased dramatically over this period.

2019-05-13-Health spending as a percent of GDP from 1970 to 2017
Chart 1. Health spending has grown considerably over the past 40 years. (Source: Health System Tracker)

But at the same time, other goods have decreased in price as a percentage in GDP. Obviously, many household goods are now more affordable than ever. You can buy flat screen TV for less than $200.

You Can’t Spend the Same Dollar Twice

If these three sources of expenditure continue to outpace other sources, over time almost all household spending will go towards these three sources alone. As a household, managing a long-term budget can be challenging (if not impossible) if almost all spending is swallowed up before any discretionary spending can even be considered.

There are, however, a few government programs that you should be aware of that can help soften the blow. Let’s begin with education savings.

The first plan you may want to consider is a state run education savings program. These programs allow households to lock in today’s rates for college to be used at a future date. Example, your one year old plans on attending your state’s university system in 17 years. How does your child know this? Let’s just assume you have a very self-assured child. Well, instead of having to pay the going rate for your state’s university system 17 years from now, all you have to pay is the current rate. Not bad if the cost of education continues to rise at a few percent above CPI each year for the next two decades.

But then there’s also 529 plans. The notion with these plans is that you can invest after-tax money today and then spend the invested capital for qualifying education expenses when your child goes to college 17 years from now. The key benefit is that all returns are tax free. This means that if you can manage to earn a return that outpaces the rising cost of education you might actually end up paying less (inflation-adjusted) than you would have otherwise, especially if you fator in the tax savings.

In the next post of this series we’ll explore programs for health care costs and housing costs that you’ll want to consider in this space.