Pushing yourself to save can be a challenge, but more and more consumers are calculating their monthly expenses only to find they have nothing to save anyway.
A recent study shows that 58% of Americans report living paycheck to paycheck in May, up from 54% the same month last year. Of those earning $50,000 to $100,000, about 62% were stuck in this cycle.
But it’s not just low-income groups struggling to pay the bills, according to the report compiled by payments and commerce platform PYMNTS and personal loan website LendingClub.
Surprising even the researchers, 30% of people with incomes of $250,000 or more lived paycheck to paycheck as well.
Anuj Nayar, head of financial health at LendingClub, told PYMNTS’ Matt Nesto that this was “a real eye-opener.”
“A year ago, when [people] they heard the term paycheck to paycheck, they thought it’s low income, it’s subprime, all these people maybe in the lower income realm. Basically no. They are all. It is all of us,” says Nayar.
Wages are rising — and so are prices
There have been many reports of wage increases over the past year. However, they have not kept up with the costs.
Nearly half of all paycheck-to-paycheck consumers say their paycheck only covers basic expenses, while some higher earners say paying for a family member’s expenses has proven to be a major factor in financial hardship.
This means there is little left over at the end of the month for discretionary spending or savings.
And what’s left over is also being eaten up by record-setting inflation. The Bureau of Labor Statistics’ Consumer Price Index shows that inflation came in at 9.1% for the month of June.
Home food is up over 12% for the year, while natural gas is up nearly 60%.
And although July’s 8.5% inflation was lower than June’s 9.1, a month of movement in the right direction isn’t enough to stop pushing, Federal Reserve Chairman Jerome Powell said. He added that it is not time to press “pause” or “stop” on inflation measures.
In July, the Fed raised the federal funds rate by 75 basis points to 2.25-2.5%, the second increase in as many meetings.
If Powell’s brief speech at the end of July is anything to go by, an increase is likely to come in September, which could push the rate above 3%.
COVID has encouraged bad spending habits
While low-income people are bearing the brunt of the impact, some middle- to high-income earners are also struggling.
“I think COVID kind of skewed everything financially,” says Rod Meloni, business editor at Local 4 News in Detroit and a certified financial planner.
Many consumers who were still employed during the pandemic were able to use the time to cut back on some of their usual expenses. For example, remote workers saved a lot on gas, work travel and meals out.
But, Meloni counters, that doesn’t mean they put all that cash into savings. Many took this as an opportunity to spend on other things.
As the PYMNT study shows, people’s savings have taken a hit in the last year as well. For those struggling to meet their monthly bills, their average savings dropped from $4,065 in May 2021 to $2,464 in May 2022.
And the end of restrictions and lockdowns this year has also encouraged people to spend hard to make up for lost time, prompting an increase in spending on travel, dining out and other activities.
“I think we’ve gotten out of the habit of … being intentional about what we’re going to buy,” Meloni explains.
“And then when inflation goes up and gas prices go up and groceries go up in unexpected ways — all of a sudden now, you’re left with no discretionary spending because you haven’t planned for it.”
The matter becomes even more pressing
For the portion of paycheck-to-paycheck consumers whose paychecks comfortably cover basic expenses, Meloni believes part of the issue may be a lack of financial education — some people see overspending as the limit.
“I don’t think it’s anyone’s fault, necessarily. We just have to get through [financial literacy] on. And one of the biggest problems is that I think a lot of parents don’t know that.”
He suggests people write down how much they spend each month and compare that number to how much money they’ve brought in. One of the best pieces of advice Meloni ever received was to set aside 20% of your income as savings.
And for those who make more than enough to cover their bills, it’s time to think longer term.
“I think the idea that you have unlimited discretionary spending needs to be dispelled,” says Meloni. “I call it the hamster wheel … because the faster you spin the wheel, the farther you go.”
Getting off the hamster wheel takes some planning. One of the best tools to help you break the pay-to-pay cycle is simple: budgeting.
Budgeting for three to six months of expenses is key to preparing for emergencies like an unexpected job loss, Meloni says.
And there’s no better time than ever to take it up, with talk of a recession on the horizon.
“I think we all have to start preparing for what’s coming … it’s definitely going to be tough,” says Meloni.
“And the only way to weather that storm is to take control, figure out what you have, what you need, and then come up with a battle plan to deal with it.”
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