Living paycheck to paycheck is an unfortunate reality for millions of Americans: according to one source, 69% of all Americans are living to sparsely that they have less than $1,000 in savings. While it makes some sense that individuals living at or below the poverty line struggle to keep money in their bank accounts, a surprising number of high-income earners are also struggling and are living paycheck to paycheck. I found this piece from Investopedia quite fascinating on the topic, and I encourage you to visit their page to learn more.
Who are these people?
A 2015 study conducted by Nielsen noted that a quarter of American families making $150,000 or more each year, end up living paycheck to paycheck, and a third of families earning $50,000 to $100,000 each year end up in the same situation. The cost of living along with household debt, consumer debt, even student loan debt is ballooning to the point that a 6-figure salary just don't go nearly as far as it used to.
Welcome to the (New) Middle Class
A 2017 report from Northwestern Mutual noted that 70% of Americans consider themselves part of the middle-class, and 68% of those who claimed to have such a status had household incomes that ranged between $50,000 - $200,000 annually, and half had incomes in the $50,000 - $125,000 range. just for comparison, the median household income in 2015 was $56,516.
However, it is quite interesting that the report showed that middle-class Americans tended to have a more optimistic view of their finances: 55% said they believed in the attainability of the American dream, compared to just 48% of the general population, and 58% said they felt financially secure compared to 47% of the general population. The difference here has more to do with whether or not expectations and beliefs are an accurate reflection of their situation.
For instance: if you have more financial resources at your disposal, it’s natural to assume that higher-income earners would have significantly more in savings, but that’s not always the case. According to a GoBankingRates survey, 23% of respondents with incomes of $150,000 or more had less than $1,000 in an emergency fund, and 6% in that income range had absolutely nothing set aside in reserves.
On the opposite end of the spectrum, life looks a lot different...
The top 1% of Americans have $1.08 million or more stashed away for retirement, according to a report by the Economic Policy Institute. High-income families are 10 times as likely to have retirement savings as low-income families, and based on the numbers, it would make sense that those at the top and bottom of the income scale would represent the extremes when it comes to savings.
However, this does not explain why those families in the middle with six-figure incomes are so far behind with regard to savings and financial security.
So what is the culprit for the lack of savings and security?
Debt is likely one of the biggest culprits. According to the Federal Reserve Bank of New York, total household debt in the U.S. reached $12.73 trillion in the first quarter of 2017 -- well past the previous peak reached in 2008. Most of the debt is mortgage-related, but student loans represent an increasingly larger share of what Americans owe. Credit card debt on its own accounts for $1 trillion of the total.
However, this doesn’t necessarily mean that the higher earners are racking up debt because of poor spending habits. For some Americans who earn six figures or more, the root cause may be a too-high cost of living. Certain cities have pushed home/rental prices through the roof (well beyond the rate of inflation) and it's now eating up more of consumers' paychecks just to be able to afford a place to live. For some families, this means a deficit of a few hundred dollars per month when all other expenses (student loans, debts, healthcare, transportation, and childcare) are paid.
What is the Lesson Here?
Ultimately, a paycheck-to-paycheck lifestyle isn’t exclusive to low-income households. A higher salary may not stretch as much for those facing a higher cost of living, especially if they rely on credit to cover the gaps -- easy to see, if you live in a city like New York or San Francisco.
Families need to to break the paycheck-to-paycheck cycle, as their long-term financial survival depends on it. Increasing income is one way, but finding strategies and plans to eliminate debt is a much more secure way to ensure that you won't live paycheck to paycheck for the rest of your life.
(This article was originally published on GradMoney on September 22, 2017)
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