Who Lives Paycheck to Paycheck? The Answer May Surprise You


Living paycheck to paycheck is hardly an unusual experience in America. According to a 2014 study by the Brookings Institute, one-third of all American families spend all the pay they earn. They have little or no financial cushion.

That's not especially surprising. Yet what is somewhat astonishing is just who falls into this category. According to the Brookings study, two-thirds of the families in this predicament qualify as middle class. They have a household income of more than $40,000. They also typically have homes and retirement accounts, good for a median net worth that's also more than $40,000.

These families don't have liquid assets. Instead, their wealth is tied up in home equity and retirement savings. And that's understandable, as both are keys to a successful retirement.

Yet having no savings cushion at all is a dire situation. It's a financial high wire act with no safety net.

Here's the truly frightening news: The Brookings study offers a relatively conservative estimate of the problem. Other surveys have shown that more than half of all Americans will fit into this category at some time or another.

Why are so few of us immune to this problem?

If you're surprised that so many middle class families live hand to mouth, here's an even more shocking revelation. Twenty five percent of households earning $150,000 also live check to check. That data comes from a recent study by Nielsen Global Consumer Insights. 

You'd think that kind of salary would preclude serious financial trouble. It should all but guarantee a nice savings rate. Yet that's not the case.

The culprit? For the most part, it's a case of lifestyle inflation.

As our income increases, our so-called "lifestyle expenses" tend to rise almost in tandem. We want a bigger house. More vacation time. Expensive consumer goods. Better schools for our children. No matter how much higher income rises, spending increases along with it.

If this sounds familiar, well, it should. Governments have been doing it for thousands of years. Too many American households have followed this bad example.

Action Plan: How do I end the paycheck to paycheck cycle?

So now that we've defined the problem, how do we address it? Here are some steps you can take to build a comfortable nest egg.

  • There's no getting around it -- saving is the key to escaping this cycle. Formulate a realistic budget of all your expenses. Rank them in terms of priority. See the items at the very bottom? Get out the scalpel and start cutting.
  • Trim the fat from your monthly budget. Then funnel some of it into an emergency savings fund. Ideally, you'll have enough to sustain your household expenses for six months. You can dip into this fund to pay for unexpected costs. That way you won't resort to loans or heavily taxed retirement withdrawals.
  • After establishing a savings fund, start directing your budget surplus into your portfolio. Low cost index funds are always a great option.
  • Maximize your retirement contribution as quickly as possible.
  • Look for other ways to reduce your expenses. Pick up the phone and negotiate for better rates whenever possible. This could mean things such as your cable bill or your mortgage. You'd be surprised how amenable service providers are to negotiation.

Breaking the paycheck to paycheck cycle isn't easy. That's made obvious by the millions of people who remain stuck in this financial rut -- people of wildly varying income levels.

Yet escaping this cycle is incredibly important. It's impossible to build wealth when living under such conditions. By taking practical steps to reduce your expenses and increase your savings, you'll be one step closer to achieving financial independence.

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