Economics of the American Dream: 2024 Edition

Everyone has heard of “The American Dream”, but what the actual economics of that? With the current economic landscape, some may be wondering how much this dream currently costs. Some factors impacting the cost are inflation, new elements of this dream, and investment vehicles available to the public. We are going to discuss all these elements and more with Caleb Silver, as Investopedia has recently released an article about the cost of the American Dream.

Related Link:

The American Dream Now Costs $4.4 Million by Investopedia

Summary – Cents of Security Podcasts Ep. 68

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Cassidy Clement:

Welcome back to the Cents of Security Podcast. I’m Cassidy Clement, Senior Manager of SEO and Content at Interactive Brokers and today I’m your host for our podcast. Our guest is Caleb Silver, Editor-in-Chief at Investopedia. Everyone has heard about the American dream, but what are the actual economics of that? With the current economic landscape, some may be wondering how much this dream actually costs. Some factors impacting this cost are inflation, new elements of the dream, and investment vehicles that are available to the general public. We’re going to discuss all these elements and more with Caleb Silver, as Investopedia recently released its cost of the American Dream article. Welcome back to the program, Caleb.

Caleb Silver:  

Thanks for having me.

Cassidy Clement:

Sure. So honestly, saw this article, was like, everyone should see this. That’s the best way to put it. Everyone should see this, or in this case, hear this. The American Dream is something that everybody thinks about. I mean, I’m a granddaughter of, a great granddaughter of immigrants. There’s a lot of elements that go into this. And at this point, at least from this article, it’s looking to be 4.4 million based on the current value of the American dollar. And that goes with retirement, cars, weddings, children, homes, etc. I mean, this doesn’t even include food and healthcare. I know there’s several caveats, but what’s the makeup here? I mean, before we even get into the question, what were your thoughts on this?

Caleb Silver:  

Yeah. Well, it’s an intimidating number, 4.4 million dollars but the important thing to recognize is that my dream and your dream and your listeners dreams have very different price tags on them. And what we were trying to calculate and come up with a number for is the wants, not the needs, right? You mentioned we are not including food, we’re not including some form of shelter, some form of healthcare. You need to have those things. You want, you aspire in some cases, some people to have other things, to have a home, to have kids, to send them to college, to have some pets, to take an annual vacation. Not everybody wants those things so the price tag is different depending on the life you want to live and what we always try to get to when we talk about financial planning and helping people with their personal finances is establishing the cost of what it means to be you today. But more importantly, what is the cost of the you, you want to be? And the you, you want to be for some people used to be or still called the American Dream.

Now Cassidy, we always look at the most popular terms of the year every year on Investopedia because we have millions of people coming to the site every month searching for something in particular. In 2023, the American Dream kept popping up, and we don’t think it’s because of people wondering, what is that thing people keep calling the American Dream? We think it’s because people thought and think, especially younger people, that dream that they were told to pursue, go to school, get an education, buy a home, grow a family, send your kids to college, make them better educated so they can do better than you. We feel like that has been disappearing for so many people as the cost of everything has gone up, but primarily the cost of housing, right? Inflation is eating away at everything, but especially housing and home affordability is at its lowest level in generations. That’s why we went out and put a price tag on, again, these are the things we might want. Not everybody wants them, but these are reasonable expectations and aspirations for somebody trying to raise a household in this country today.

Cassidy Clement:

All right. So in this article, people are going to see various items mentioned. Something that might be retirement savings, college, funeral, vacation, etc. What exactly made up the research and the findings of this? Was this something, I know you mentioned that you had seen some search activity and some, actual behavior on your website that made you guys want to do this. But you know, was there anything particular that drove this or that, you guys went and particularly sought out as part of the research?

Caleb Silver:   

This was sort of coming from that desperation we felt from people searching for this term and wondering where it came from. And if you’re wondering where it came from, it did come from a novel in the early part of the 20th century when someone was describing just that very thing of your parents may have come to this country for the first time and tried to set up a life that was better for you than the one they had lived. That’s where the American dream came from. So Homer Winslow Adams wrote it in a novel, but it’s been just used over and over again through financial services. We talk about it all the time in financial planning. But the fact that that dream was getting further and further away from people who thought that they had done all the right things, right?

They had gone to college, they had gotten an education, they had working as hard as they could, and they still couldn’t get to this dream. And if you’re listening to a lot of the rhetoric on the campaign trail, you’re hearing from one party that the American dream is dead, it’s completely gone. You’re hearing from another that they want to re-inspire people to have that dream. So that was also in the back of our minds as well. We knew it would come up as a talking point, but to actually put a price tag on it, for again, the things that we might want, not the things we need, the things we might want.

Not everybody’s going to have kids, not everybody wants to send their kids to college, not everybody wants to marry off their child or bury a relative or can bury a relative, but these are the things we thought, if you could do it, you might want to, they’re aspirational. So we looked at retirement, the cost of owning a new car, the cost of marrying one of your children off, raising two kids and sending them to college, owning a home, owning a pet or several pets throughout the course of your adult lifetime, taking that annual vacation every year, and then the cost of burying somebody.

Again, everybody’s dream is different. So different things go into it. We wanted to put a number out there for the basics and then allow people to actually build their own dream. And we have a tool coming on Investopedia.com very soon that allows you to plug in your own dream elements to come up with your own number because knowing the number at the end of what you might need allows you to work back from that and not enough people do that. They always think I’ll never have enough but they don’t actually know what enough means, so that’s why we put that price tag out there. And we debated, pretty frequently about what to put in it. These are the things we came up with. These eight elements we think represent aspirations, things you could do if you wanted to do them, and that a lot of people want to do if they’re raising households in America today.

Cassidy Clement:

Yeah, I mean, you guys did a great job with this article. I mean, reading through it, some of the data points, the ways that you guys noted your limitations and your data trends. It was great, but it also really highlighted that fact that, you know, depending on where we are economically or where you are based on your investment journey, we could say, you know, there’s picking and choosing that go into a lot of these elements. For example, when we’re talking about the element of raising children, there is a cost variation between if you think that they are going to want to go into higher education or maybe they want to go to a trade school or maybe they don’t want education after high school. Who knows? But all of that goes into these different impacts.

I mean, just looking at the one element, I mean, I’ve gotten all my Girl Scout badges when it comes to being a bridesmaid at this point in my life. And just the wedding section alone, talking about the differential or multiple that goes into a wedding with like the major floral arrangements or the larger guest list. The amount that goes into funeral costs now that the dollar has gone through a certain rate of inflation. I mean, I know this is kind of crazy to think about because it makes you visualize a timeline and a financial table for cradle to grave. But honestly, it’s very important to look at this. So when you guys were looking at this study, and I know that there were some other articles that were leading up to this from previous years, were there certain trends that you noticed or certain investment styles or something like that that people were going towards to achieve these things?

Caleb Silver:  

 If you work, for your whole adult lifetime, call it 25 to 65, 40 years, and you’re making the median income adjusted for inflation. By the end of your working lifetime, you’re going to end up with something like 3. 3 million dollars. Well, if our price tag is 4.4, you got a gap there of over a million dollars. And that’s going to mean you’re going to have to shortchange something. Maybe you don’t own the home. Maybe you don’t have enough saved for retirement. Maybe you don’t end up having a family, but you’re going to end up short of about a million dollars. If you’re a couple, if you’re a dual earning household, you have a much better chance.

Your combined earnings, just earning the median income combined over that same 40 year stretch is over 5 million. So coupling is actually a good financial decision, but how else are you going to make up the gap? The gap between what it costs to be the you, you want to be, to have these reasonable expectations and what you can actually make in your lifetime. The only way to make up that gap is to work even harder or have your money work for you, which is investing, right? And we put in the cost of retirement here, about 1.6 million dollars assuming you’re going to live 20ish years after your working days are over, and you’re going to want to have that replacement income.

Well, that could be a lot higher for some people and a lot lower for some. But if you don’t start early, you can’t even have that conversation. So investing is a gap filler to help you realize your dreams. There’s really no other way that you can consistently build wealth over time than the magic of compounding. And the earlier you start, Cassidy, the better. We’ve looked at studies that say the difference between starting at 25 and 35, if you’re averaging $6,500 a year, and you won’t at the early stage of your career, but you might by the midpoint of your career, that difference is about $350,000 right? If you start at 25, And you invest an average of $6,500 a year at a rate of return of just 6 or 7%, which is below the stock market, you will end up with three quarters of a million dollars. You’re on your way there. So this is another lesson just by looking at the price tag of the things you might want in life. How are you going to get to those? You have to have your money working for you while you are working over on this side of the equation. Your money’s got to be working 24/7 over here.

Cassidy Clement:

Yeah, I mean, when we’re looking at the table that is part of this article, what I found very interesting is exactly that. You have to, for some people, maybe the time has passed, but it’s almost like no time is too early to start to try to get there because as you mentioned, some of those pieces, if you really want them to be a part of your life, you may end up having to forego because the math just doesn’t allow it. You know, there’s certain pieces that some people may think are unattainable, whether it’s for the investment time or, maybe it’s the rising cost of living, the wage that’s associated to the line of work they’re in. But when you guys were looking at this from more of a broad perspective, I mean, as I just said, some people may say this doesn’t apply or it doesn’t work in my type of lifestyle right now or my timeline, but was there anything that you found that was more surprising for 2024 than maybe previous years or previous studies?

Caleb Silver:  

Well, when we did this, for the first time last year, we thought about college education because this was something that was in a lot of people’s minds. We’d come out of the pandemic from a couple of years earlier. The notion of paying full price for college tuition just seemed like a stretch for so many people and I think a lot of people were questioning it. So in this case, we took two kids. We took the cost from the United States Department of Agriculture, which actually does a calculation every year of the cost of raising a child, feeding them, and giving them health care. And we added public college, right? One of the cheapest versions, not community college, but public college to that equation. And if you’re talking about two kids, sending them to college and raising them to 18, 4-year college, you’re talking about $830,000. So know that out of the gate.

People know that college is expensive, but they also don’t calculate the cost of what it means to actually raise your child. What does that cost? It’s a cost center. Ultimately now, it’s worth it. I have two kids and I love them and it’s worth every penny, but you have to also think about these things as you plan your life from a financial planning perspective. What would it cost to actually have to raise those kids and send them off ultimately? And now we know a lot of kids are coming back and living with their parents again. So you’ve got to think about those lifetime costs. How much are these things going to cost you at different life stages? And if you look at the article, I know you guys will post it, you will see timelines of when we incur these expenses in our life because raising a child, sending them off to college, well for me, the raising part is over. My kids are in college, I’m in that heavy expense period but in a couple of years I won’t have those costs. I might have to give them a little money here and there, but you have different periods of your life, different life stages where you’re going to need a certain amount of money if you want to make these choices.

So that’s another part of financial planning, this holistic financial planning that we talk about. The cost of being you, the cost of being you as a head of a household or as a partner in a couple that is raising children. Maybe you have just pets. You have to know what that cost is and ultimately what the cost will be so you can work backwards from that in order to afford those things.

Cassidy Clement:

Yeah, definitely. And I think what’s really interesting, at least for people who like to follow this in terms of financial theory or behavioral finance, what’s so interesting from the American Dream perspective is how it’s evolved over time. Initially it was very, centric on the nuclear family, where now, as you mentioned, you know, it may only go into the pets area for some people. It may go into a condo perspective for some people instead of a house. I mean, if I were to talk to my grandparents about the American dream that they had, which was their kids got to finish high school because some of them didn’t, and they got a house to live in, and they had a car. If I were to even utter the words pet insurance to my grandparents, they would have no idea what that would mean.

I mean, I had family that had chickens in the backyard. It was a very different world but of this shows how different and how it’s a fault, but when you pair that with the changing economic environment, how it really needs to be something that you selectively partake in these different, elements from different, I think you said it was, more of a holistic financial planning that fits into your time and space. So when we look at this now, on paper, 4.4 is high. So what are some ways that listeners can prepare for the different elements if they choose to partake in all of them? What are the generalities of answering that question?

Caleb Silver:  

Yeah, let’s just take one of them, a big one, which is owning a home. We put that price tag up there of $929,000. That’s a 40 year time commitment, right? We’re thinking about what it would cost over a lifetime and maybe you own one or two, maybe you flip and you’re able to use those proceeds. But just owning a home, that’s come into question so much lately because home affordability is at a multi-generational low. The median mortgage payment right now in the United States is something like $2200. That is a stretch for millions of people, just to come up with a mortgage payment, let alone be able to afford the medium priced house at $420,000. You can make the decision, and this is all about decisions and opportunity costs, to rent instead of buy. You don’t ever have to own a home, you’ll never build the equity, which is a part of wealth building, ultimately, but you can make the decision and say, no, you know, I’m in a rent stabilized place. I’m perfectly comfortable. I don’t need more rooms. I’m happy where I’m at. I have a cool landlord. I’m good here and guess what? My rent is 2000 bucks a month and it hasn’t changed in 20 years. You’re in a completely different environment, in a completely different ecosystem.

The cost of your dream is going to be different, but as people who are having to make these decisions, you have to decide that for yourself. Now, me personally, I live in New York City. It is actually much more financially advantageous for me to rent than it is to buy because homes here are unaffordable. But I know what I can afford in rent and I can use the rest of the money that I might have to use on a mortgage to invest, to save, to pay for some of the other things I want. So these are about decisions you have to make when you look at these categories. Again, a lot of people are going to say, I don’t want half of those things. I don’t want kids. I don’t like pets and I don’t drive. I just ride my bike. Well, your cost is going to be very different, but let’s say you’d like to take that annual vacation to somewhere really cool with your bicycle and ride in Fiji or ride in Europe, that’s going to cost you some money. This is all about setting a template for it and then allowing people to say. You know what? That part of the dream isn’t my dream, but my dream consists of these things so let me do that calculation and you could wind up at 5.1 million, 3.1 million or even cheaper if you want to. But we also know Cassidy, that some people have a very expensive lifestyle and the cost of being them could be 10 million, 20 million, 25 million.

Their dream could be the home in Telluride and then the beach house in Palm Beach, Florida. And then every year they also like to go to Europe because they like, you know, eating at the Michelin star restaurants. That’s a different dream. The whole point here is to say the basics of what we might want reasonably as a family, as a household are going to cost this much today, and they’re only going to go up over time because what happens? Inflation keeps rising year after year. The average inflation rate over the last 60 years is 2.7 percent.

Cassidy Clement:

Yeah, you guys had some really great caveat points throughout this article. We’ll definitely be linking to it. I encourage all our listeners to go and read it. I found it so interesting how, with the data that you guys have, looking at the way that the American family we’ll say, has molded over the past, we’ll say, 50 years. I mean, we all know here, technologically, we have been going to the moon, literally. We’ve been doing a lot of stuff as a society that allows for that to happen. Now people have more access to investment potential, education potential, travel, food, all of these things. But it is really wild how now if you want to achieve a lot of that stuff, you have to look at savings and investments so much earlier than you maybe would have in the past, because of the way that the economy is going.

Caleb Silver:  

Absolutely. And don’t forget, home ownership was something that was really pushed over the last 50 years. This wasn’t a birthright of people living in America in the 20th century. It was very difficult, to buy a home at that time, but home ownership became something that the financial services and industries pushed. It became something that politicians pushed to create what is now considered by many to be the American Dream. That wasn’t always the case. And don’t forget that up until about 35, 40 years ago, it was pensions, right, that paid for people’s retirement. They worked for companies as long as they could. And when they couldn’t work anymore, hopefully they had a pension that took care of them for the rest of their life.

Pensions are only about 10 percent right now of that post retirement income for a lot of people. Most companies, deliver it over to us, right? It’s our responsibility to put our money to work in our 401ks. It is on us to invest for our own future. That burden has shifted, which means we have to have shifted our mentality. If we want to be able to afford the things that we might want in our lives.

Cassidy Clement:

Yeah, these pieces all come together for this. For those of you who like behavioral finance and sociology and all of that, it comes together to be such an interesting look at the evolution of the American Dream, both socially and financially. But thank you so much for coming on and talking about this today, Caleb.

Caleb Silver:  

Thank you for having me.

Cassidy Clement:

Sure. So as always, listeners can learn more about an array of financial topics for free at interactivebrokers.com/campus. Follow us on your favorite podcast network and feel free to leave us a rating or review. Thanks for listening, everyone.