“All you need in this life is ignorance and confidence, and then success is sure.”
–Mark Twain
There has been an increase in people living paycheck to paycheck. The trend combines financial wishful thinking and the absolute confidence that nothing will go wrong in the future. Unfortunately, that combination is unlikely to succeed for reasons we will discuss.
The stories about this phenomenon have been coming thick and fast. First, I read about someone earning $350,000 per year living paycheck to paycheck. You can read about that here. I am still shaking my head.
Then I read that almost two-thirds of Americans live paycheck to paycheck with little financial cushion.
The numbers stunned me. What is going on here? Why has this happened? What are the risks? And what can the average family do about it?
LIVE NOW, AND COVID
This pattern of behavior has been around for a long time. But among our friends and family, it increased as the Covid-19 pandemic started to wind down.
And you could not blame anyone. As a society, we all had a kind of near-death experience during the pandemic. Concerned for our lives, cooped up in our homes, unable to enjoy life, that was a dark, dreary joyless place.
So, now we are celebrating, and many people do paycheck-to-paycheck living. Much as in the aftermath of the last worldwide pandemic in 1918, we are having a modern version of the roaring 20s.
For instance, travel and the desire to travel have rebounded strongly. People continue to buy big-ticket items at a brisk pace. And the restaurant business has seldom been better. So, we want to pamper ourselves with paycheck-to-paycheck living. And why not?
YOU CAN STILL GET A JOB, SO WHY WORRY?
Why indeed? While the economy is a little weaker, employment levels remain strong. And unemployment is the main reason people turn cautious, save more, and draw back from the paycheck-to-paycheck lifestyle.
However, as inflation has eroded our buying power, the risks are rising.
You see, the primary cause of living paycheck to paycheck is a lack of financial resources to cover essential expenses. This can happen for several reasons.
For instance, low wages are a common cause of living paycheck to paycheck, as many people may not earn enough income to cover their basic expenses. This circumstance can make saving money or investing in the future challenging.
A high cost of living can also contribute to living paycheck to paycheck, especially in areas where housing costs have risen. That can make it hard to afford decent accommodation and other essential expenses. For example, in my city, the rents have increased by over twenty percent in the last year and a half.
Debt is another common cause of paycheck-to-paycheck living, as people may have to use a significant portion of their income to pay off debts such as student loans, credit card debt, or medical bills. One reason the economy has remained strong is the expanding use of credit that people have used to cover expenses. But that cannot last forever, and people are more likely to be tapped out and unable to borrow more as interest rates rise.
Lack of financial literacy can also be a factor, as some people have not received adequate financial education. In turn, that can lead to poor financial decisions and make them unable to manage money effectively.
WHY THE LIFESTYLE ITSELF IS A PROBLEM
But what is so dangerous about this lifestyle? Here are the main risks of a paycheck-to-paycheck lifestyle:
- No financial cushion: Living paycheck to paycheck means there is no cushion to cover significant unexpected expenses, such as a medical emergency or a car repair.
- Limited opportunities for financial growth: people may not have the resources to invest in their future, such as saving for retirement or pursuing education or training opportunities that could lead to higher-paying jobs.
- Increased debt, or debt as the backup plan: People who live paycheck to paycheck may rely on high-interest credit cards or loans to cover expenses, leading to increased debt and interest payments. That, in turn, stresses their household finances further.
MULTIPLE SIMULTANEOUS EXPENSES ARE THE PRIMARY RISK FACTOR
At a nonprofit I am involved in, we usually see people in trouble because several things have gone wrong at the same time. When a family combines multiple simultaneous expenses with a paycheck-to-paycheck lifestyle, the results are usually negative.
Here are the primary reasons for bankruptcy in the US and the usual factors that create risk for paycheck-to-paycheck families:
- Medical bills
- Overspending
- Divorce
- Acts of God
- Loss of a job
The main catalyst we see for financial problems is often poor health. People become ill, lose their jobs, and cannot pay their bills. They lack a backup plan to get them through a health crisis.
SO, WHAT SHOULD YOU DO?
As you may have gathered, not all the risks of a paycheck-to-paycheck lifestyle are within the control of those who live it. For example, if you are poor, you may not have the option of cutting a car payment—since you may not have a car.
The key is to control what you can now and make plans to improve your future. Here are some steps that can help:
- Create a budget: track your income and costs. This action will help you identify areas to reduce costs and prioritize spending.
- Reduce costs: Look for ways to reduce your costs, such as cutting back on dining out, canceling subscriptions you don’t use, or negotiating lower bills with service providers.
- Increase income: Consider alternate ways to increase your income. For instance, ask for a raise or promotion at work, take a side job, or sell personal items you don’t need. You may even consider returning to school part- or full-time to get into a higher-paying profession if short-term fixes won’t solve your problems.
- Build an emergency fund and/or obtain insurance: Start accumulating savings to cover unexpected expenses, such as car repairs or medical bills, or purchase insurance to deal with major unexpected expenses.
- Pay off debt: Focus on paying off your most expensive debt, such as credit card debt, as soon as possible. This action will help reduce your spending on high-interest expenses and free up more money for saving or investing.
Disclaimer: consult with a financial fiduciary before taking any steps outlined here. Not all advice may be suitable for your circumstances or investment style.
Photo Credit: Blake Wisz
License: Unsplash