Middle-class reality check: The 'essential' indulgences

It's not food and rent that are busting our budgets, say experts. It's those little luxuries -- the lattes, the pedicures, the flat-screen TVs -- that we now consider basic needs.

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By Lauren Barack, MSN Money

It's a familiar complaint of the middle class: We can't afford our lives. Rising housing and health-care costs and tricky tax burdens have put the squeeze on us, making it harder than ever to imagine a golden retirement.

But experts say otherwise. Rather, it's that our standard of living has changed so much in the last decades that our "essentials" are no longer that -- so when times get tight, it's hard to find a way to cut back.

My mother would raise an eyebrow at my bimonthly $200 hair highlighting, my $28-per-week coffee fix and my new dependency on $10 organic, grapefruit-scented hand wipes. And, yes, they fall outside the category of true essentials -- a place to live, food to eat, clothes to keep out the chill.

But the reality is that, to me, they're bare necessities. Video: How much are those highlights?

"Our standards have just skyrocketed," says Dennis Gilbert, sociology department chairman at Hamilton College in Clinton, N.Y. "If you look in newspapers, the images we see to tell us what's normal are very upper-class images.

"Twelve hundred square feet used to be considered a standard-size house for a family," he adds. "Not anymore. The expectations and standards have changed."

A rising standard of living shouldn't be cause for concern -- and when we can afford these little luxuries, no problem. Video: What are you buying?

But the truth is that many in the middle class spend when they should save -- on iPhones, on designer sunglasses, on flat-screen TVs -- and in many cases buy beyond their means. Bottom line: We're just not saving enough. Spending diary: Where does the money go?

The U.S. Department of Commerce reports that, as of the summer of 2007, our personal savings rate was just 0.5%, compared with 9% 25 years ago. That is one of many signs Americans are living too close to the edge. The Mortgage Bankers Association, a trade group, reports that more than 5% of all mortgage loans were delinquent in the second quarter of 2007, while consumer spending remained fairly steady.

Talk back: Are "luxuries" and "wants" hurting the middle class?

Experts believe we should save at least 10% of our income for our golden years -- if we're in our 20s -- and 20% to 30% when we are in our early 40s. They tell us retirement accounts should be fully funded before parents even try to save for a child's college bills.

My husband and I do try. We don't own a flat-screen

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television, and we favor street vendors when shopping for accessories. But what about the $2,000 I spend every year for haircuts, hair color and lemon-grass-cented conditioner? Planted in a savings account to accumulate interest for 30 years (let's calculate that at a conservative 2%), I could end up with nearly $86,000. That's a lot of Clairol. Add it up: How much can you save?

It would be easy to write this off as just a New York City problem. But it wouldn't be accurate.

Margie McClintick, 57, a corporate executive recruiter from Houghton Lake, Mich., started to put a larger chunk of her income into savings after divorcing her husband a few years ago. Expensive dinners out are now much less frequent.

But the luxuries she still allows herself include $3 coffees at Starbucks, $70 visits to a salon and makeup from Laura Mercier, whose line features $22 lipsticks.

Why keep these items on the "must-have" list even when money gets tighter?

"I find that these are important," McClintick says. "These are things that make me feel good about myself."

Call it our own take on consumer confidence: Spending money makes us feel good. We're not just indicating our security in the U.S. economy; we're convincing ourselves that our personal lives are OK and that we're "keeping up with the Joneses" we see on television, in magazines and on the Web.

"No one likes to be told they can't afford that," says Kara Richter, co-founder of From Rags to Riches, a Minneapolis online handbag-rental company. "So if there's a means, there's a way." Video: Renting a $1,400 purse?

Richter's clients can't afford to buy the fancy handbags she carries -- like a $1,295 Yves St. Laurent bag -- so they rent them instead, for $140 a month. For her, it adds up -- she's projecting revenue of about $1.2 million for 2008. But her clients can rationalize the expense; their budgets tighten but don't collapse.

Financial planners caution that Americans need to do a better job defining essentials.

"There needs to be some level of impulse control to differentiate between needs and wants," says Michael Kitces, director of financial planning for Pinnacle Advisory Group in Columbia, Md.

"People convert large asset purchases into smaller monthly payments," Kitces says. "But when you add interest, that can crowd your ability to save."

"It's not that one extra cup of coffee" that's straining

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the middle class, Kitces says -- "but the extra payment on the car lease, or rent on the apartment that people feel entitled to or the payment on the big-screen television."

I get that. I know I should put away as much money as possible -- for my retirement and for my daughter Harper's college years. By the time she's a freshman, the cost of a bachelor's degree at a private university could add up to nearly $300,000, according to the College Board, a nonprofit group of educational institutions. At the rate we're saving, I am not sure we'll have put away quite that much. We're trying.

Still, the siren calls. On a recent run to the drugstore (Band-Aids, paper towels, dental floss) Harper spied a battery-powered Hello Kitty toothbrush and brought it to me with a breathless catch in her voice that I recognized from my own.

"Mama, please!"

I took a close look at this candy-colored cartoon character, a dual-headed number that promised to clean my child's teeth in a whirling vortex of bliss. It was $7.99. Then I glanced at the much more practical, soft-bristled, sad little substitute, which had the unfortunate luck of being stocked next to its superstar cousin. It was perfectly adequate and $2.99.

Harper saw me hesitating and saw she had but one moment to make her case.

"Mama, I have to have this." Photo: Harper with her toothbrush

I knew exactly what she meant.

Talk back: Do you feel squeezed in the middle class?

Return to Middle Class Crunch home

Published Dec. 28, 2007

Produced by Elizabeth Daza and Peggy Collins/Graphics by Joe Farro and Hakan Isik