Cheap luxuries, pricey necessities: Why Americans are really going broke

The so-called Latte Factor. It’s a pop culture metaphor for how much money consumers waste on small, frivolous goods. It was first coined by personal finance author David Bach. But then Oprah got a hold of it, and it became a guiding principle for people on cutting back small to save big.

Unfortunately, it doesn’t work, says Helaine Olen, financial journalist and author of the book, "Pound Foolish." Olen says, “It would be nice if it were true because we could really solve our financial problems. But the fact is, it’s not true.” Olen says the little things like buying super-sized lattes and cheap clothes are not the reason Americans are in debt; it’s the big things. “It’s health care, housing, education," she says.

Olen recently penned a Twitter essay pointing out that the small luxuries Americans love to buy, like smart phones and clothing, are actually going down in price, but the cost of the necessities is going up. Olen calculated one month of her health insurance bills cost the same as 520 iced teas.

According to the Center for American Progress, between 2000 and 2012 a married couple with two children saw a 32% jump in the overall cost of living. That's when you combine childcare, housing, health care and savings for both college and retirement. At the same time, Americans aren’t making as much money. According to the U.S. Census, the median household income dropped 8% between 2007 and 2013.

One of the big rising costs is childcare. More and more families are faced with a decision as to whether they would be better off to earn two incomes and put a larger percentage of those incomes toward child care or just have one parent stay at home. A Pew Research Center report found that the percentage of mothers who stay at home reached 29% in 2012. That’s the highest percentage in two decades.

So what’s the solution? Olen says government intervention. “I think they way we’re going to get help is the government stepping in and saying, ‘Look, we have to deal with these crazy health insurance costs. Or we need to deal with the cost of higher ed,’” she says. “It’s not going to be you or me giving up our lattes. It’s going to be someone else saying this can’t go on.”

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