Screw Living Paycheck To Paycheck

78% of Americans are living paycheck to paycheck. This article explores why people are trapped and offers actionable tips to break the cycle.Are you living paycheck to paycheck? Screw that!

If your monthly budget is tight now, just wait until the next recession. You’re gonna be screwed much worse.

Now is the time to break the paycheck to paycheck cycle and start building wealth.

For years, I’ve assumed most of my readers don’t live month to month. But according to a recent survey, a surprising percentage of American’s are living paycheck to paycheck, even as our economy is booming.

In this article, I’m going to share my own past troubles with cash flow and look at the causes and cures of paycheck to paycheck living.

Surprising Numbers

In the latest U.S. job report that came out on June 1st, the unemployment rate fell to an 18-year low of 3.8%.

More jobs (6.7 million) are now available than there are people out of work (6.4 million). That’s never happened before.

Our current economic expansion is in its 106th month. That’s now the second-longest expansion next to the one ending in March of 2001 when unemployment was at a similar level.

This is great news for everyone as a rising tide lifts all boats. Of course, the longer this continues, the more likely we’ll experience a recession.

Finding work when the economy is strong can be a tremendous opportunity as I recently learned.

Yet, even in these epic economic times, a recent survey found that 78% of U.S. workers are living paycheck to paycheck. That’s up slightly since in 2013.

I would have guessed a lower percentage. But readers have contacted me about this. And followers on Facebook have commented about how some of my articles are meaningless to them because they don’t have any money leftover to invest each month.

This is a huge problem.

A Cash Flow Conundrum

People living paycheck to paycheck have a cash flow problem. All of the money that comes in during the month, goes out. They have little or no savings to their name and often have a negative net worth.

This is why I recommend saving first, so you don’t spend it all.

Cash flow problems stem from low income and recurring payments beyond basic living expenses. Excessive debt is a common cash flow killer. Debt payments pile on top of monthly living expenses. Have too many and they consume all of your potential savings.

My cash flow was suffering a few years ago due to a suffocating car payment and increased costs associated with having kids. I felt ill at the end of each month. The problem sneaked up on my blind spot when our family purchased a minivan.

When I diagnosed the problem and decided to make a change, I had to make some sacrifices.

One of those was eliminating the car payment from my life. The $563 monthly payment was killing our cash flow, though I have justified it because the interest rate was only 0.9%.

Low rates like that are a trap.

So a big chunk of our savings went toward the loan principal and I focused on paying off the $12,000+ debt for months instead of spending or investing.

For the record, I never regretted buying a new minivan. Only that I didn’t save enough cash for it.

I describe the problem in detail in an article called Cash Flow Suffering, Change Shit Up! from two summers ago. The article offers a bunch of tips on how to break a cash flow conundrum if you’re suffering today.

My cash flow problem was minor compared to the 78% of people in that survey. I was still investing pre-tax money into my employer-sponsored 401(k) and saving for college each month. But the balance of our monthly budget that was treading water.

As someone who constantly thinks about personal finance and had a healthy salary at the time, I still felt trapped.

Anyone who doesn’t pay close attention to their budget is highly vulnerable to a cash flow problem.

Why are so many People Living Paycheck to Paycheck?

So why are so many people living paycheck to paycheck when the economy is so strong? Well, I’m not an economist (if I were, I’d provide more data and less opinion), but three reasons come to mind:

  • Behavior
  • Low Wages
  • Increasing Costs

Behavior

As the economy strengthens, more and more people are individually better off. When individuals earn more, they tend to buy more material objects. They typically borrow and spend more, not save more.

Big-ticket items such as a house or car are almost always purchased with borrowed money.

People who achieve newfound prosperity choose to maximize their buying power and purchase more expensive houses and cars than is necessary.

The loans associated with these larger purchases require long-term payment plans. Those payments crush cash flow. Add a student loan and some credit card debt to the mix, and monthly income vanishes.

A mortgage can be a helpful financial vehicle over long periods of time. But not if you overspend on a house.

This is, unfortunately, the American way. A bunch of us are trying to change this mentality. Financial education plays a big role in the ability to manage a monthly budget.

Low Wages

Despite the strong economy, not everybody is participating. Wage growth increased 4.56% in April year-over-year. That’s below the average of 6.21% from 1960 until 2018,

But we know that wage growth is stronger in metropolitan areas but stagnant in many parts of the country.

Economists talk a lot about wage growth in a healthy economy because it’s part of the cycle. When the unemployment rate is low as it is today, employers have to pay more for talent, increasing wages.

But higher wage growth hasn’t happened yet in this cycle. Perhaps because… and I’m just throwing this out there… employers have a broader pool of workers to choose from thanks to the surge in remote working. Or maybe globalization or robots or some combination of many factors.

On an individual level, low wages stem from lack of education. Education level is a very strong indicator of lifetime earnings amounts. However, the cost of attaining a formal education is out of reach for many people these days.

Certain people are disproportionately impacted by low wages because of where they live or socioeconomic background.

Not everybody gets a fair shot, making it more difficult to make ends meet.

Increasing Costs

Housing is expensive in the big cities and suburbs. Exorbitant housing costs in places like San Francisco are well-documented.

In the Washington D.C. metro region, where I live, density is increasing while prices continue to rise. Even so, the price of my condo hasn’t risen much. Our single-family home in the suburbs has only risen about 10% over the past seven years.

Life feels expensive. Maybe because in those seven years I’ve started providing for four other human beings.

With the economy strong, inflation is starting to pick up too. Inflation is the general increase in prices and the fall in the purchasing value of money.

It slowly makes stuff more expensive.

The Consumer Price Index (CPI), the metric most commonly used to measure inflation, rose 2.8% in the 12-month period ending in May. The Federal Reserve’s target inflation rate is 2%. That’s one reason economists expect to see multiple rate increases this year (including this past Tuesday).

Rate increases lead to higher borrowing costs for everyone which will increase the cost of living even more.

And let’s not forget about the rising cost of college and healthcare.

How to Break Free from Living Paycheck to Paycheck

It’s tempting to accept that you can’t save money because you:

  • don’t make enough money
  • can’t earn more
  • have spouse/kids to support
  • have too many student loans
  • were slammed with medical bills
  • or don’t have anyone to help you

All of that can be true. But that doesn’t mean you can’t make the sacrifices and changes needed to start crawling out of the trap. Escaping the paycheck to paycheck cycle requires a change in mentality.

Spending choices are made every day. You might buy coffee, watch cable TV, eat out, or wipe your butt with premium toilet paper instead of a basic brand.

Each spending decision is a choice to consume more or save. One small purchase or premium upgrade may not seem like much. But hundreds of those every year make a difference.

When most people save a buck in one place, they turn around and spend it somewhere else. Then still end up broke at the end of the month.

Worse yet, most people don’t have any emergency savings. So when something happens that requires money, debt is the only solution.

It doesn’t have to be that way.

In a previous article, I provided a bunch of concrete actions you can take to fix your cash flow problems and stop living paycheck to paycheck. Some ideas include:

  • Do a budget so you know where your money goes
  • Building emergency savings so you don’t end up in the hole when the inevitable occurs
  • Change your Form W-4 to increase your take-home pay and decrease your tax refund
  • Cut spending and pay off debts to reduce recurring payments
  • Refinance your mortgage to lower your monthly payments
  • Refinance or consolidate consumer debts for lower rates and payment amounts
  • Temporarily decrease retirement contributions to free money to pay off debts

But the real secret to breaking free from the cycle is mental. Choose to break the cycle. Educate yourself. Then follow through.

We also make choices about earning. 40 hours per week may not be enough earning power to break out of the paycheck to paycheck cycle.

Second jobs are everywhere.

Side business opportunities are everywhere too. But without the motivation to break the cycle, it’s easier to keep on living the same way.

My day job is a 40-hour per week gig. I come home, maybe go to the pool, eat, and put the kids to bed.

Then I have a choice. Do I work on my side business to try and earn more? Or do I watch The Americans with Mrs. RBD?

4-5 nights a week I choose extra work. This effort helped me escape a bad cash flow situation and now feeds my investment accounts which are earning me extra money every day.

Since I broke the cycle many years ago and again in recent memory, I don’t necessarily need the extra money or work. But I enjoy it, and it’s helping me to reach my goals sooner.

Conclusion

Reading that 78% of Americans are living paycheck to paycheck was an eye-opener, especially in such a booming economy. I’d be naive to think that my readers are immune to this statistic.

Though you may not be one of them, it can still sneak up on you like it did to me at age 41. Buy the wrong car or house and your cash flow situation will be screwed shortly after.

We should also all understand that despite the strong and strengthening economy, not everyone is participating. People are still struggling, and when the next recession arrives, those living paycheck to paycheck will be most vulnerable.

Our job is to make sure it’s not us.

Photo by Steve Johnson via Pexels

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10 Responses to Screw Living Paycheck To Paycheck

  1. Marc June 14, 2018 at 7:12 am #

    78% is definitely a surprising number. It’s interesting to read more about your situation. I can relate to working on a side business after a full-time job. That’s basically how I got away from living paycheck to paycheck as well. After about a year and a half of doing that (and saving the money I made from my business) I was able to leave my job and pursue my business full-time. I definitely recommend a part-time business to people who are looking to improve their situation, but it’s definitely not easy. Having the discipline to work in the evenings after a full day at your job is something that doesn’t come easily.

    • Retire Before Dad June 14, 2018 at 7:47 am #

      Hey Marc,
      Congrats on being able to pursue your biz full time. I experimented with that for a few months, but was always planning to return to corporate America. With a family, the benefits are really important to me. Plus I figure if I can earn on that side plus a salary, I’ll reach my goals quicker. Thanks for sharing your thoughts.

  2. Luis E Perez June 14, 2018 at 8:47 am #

    Well, I am also a corporate rat, although at the Director level and able to save in my 401K where I have about $200k saved and I have been also able to save about $80k in my savings account. But I still have to come to work every day and I have been following you to build an investment scenario that could produce income flow so I can stop working and enjoy life. At 57 years old, my 401K are not near enough to sustain my retirement life in about 10 years and my savings shoul dhave been better… any advise?

    • Retire Before Dad June 15, 2018 at 1:56 pm #

      Hi Luis,
      Nothing wrong with being a corporate rat, one rodent to another. Sounds like you have a decent chunk of savings. But still need to work. That is totally normal, in fact, you’re well ahead of most. I’d simply double-down on putting away as much money as you can to get closer to a date you can leave work.
      -RBD

  3. Evan June 14, 2018 at 8:59 am #

    This is a good reminder that there is always something to be doing that can put at least a little money back in my pocket. It’s all about being able to realistically parse needs and wants, and keeping in mind that being able to afford something ought to be a given for any purchase and not a way to justify that purchase.

  4. Tim June 14, 2018 at 9:58 am #

    I’ve been reading your site for a couple of years now. One of your NSFW articles popped up in the search engine results and introduced me to your site and I’ve been hooked ever since. You do a good job with your writing. And your overall theme resonated with me. My wife and I are a bit older than you – not too much. I’m 49 and my wife is in her early 50’s. And we are childless. But it was always our goal to retire at 55 as well so the overall theme of your blog hit home.

    I wanted to comment on your recent writings where you alluded to maybe even breaking free to do your own thing before 55. I wanted to say to you to keep the faith. After following personal financial tenets our entire marriage, I can you that at least in our case this stuff works. Compounding works. Living below your means works. My wife is hanging it up this year – 3 years before the original goal of 55. I have an outside shot at 50 or 51. Worst case, I can definitely quit the 40 hour gig and do something a bit less stressful.

    Sites like yours continue to provide the motivation. I hope all your readers take heed. Getting “good” at personal finance takes some work and it takes an inner desire that allows one to push past what the marketers tell us we “need”. And it generally takes some time – think in terms of decades (Although I’m also a fan of MMM, I don’t like bicycles enough to try to retire after only 10 years). But it is possible if you are reasonable about the amount of time you need, are reasonable with your spending habits, and have a reasonable income.

    Best of luck with your future plans. Keep writing and I’ll keep reading.

    • Retire Before Dad June 15, 2018 at 2:31 pm #

      Tim,

      Thanks for all the kind words. I’m always happy to hear when readers stick around. I wrote that NSFW post at least three years ago now but people still mention it from time to time. Ironically, back then I was not happy about my work. But since then, I’ve turned a corner. I really like my new employer. There’s a ton of opportunity and the benefits are great. My hope is that I’ll want to keep working so that I have three good options… retire early, keep working, or quit and be a soloist.

      I know this stuff works. I’ve seen tremendous growth in my own net worth over the years. I’m still hoping to ride through one more recessionary cycle before getting truly serious about hanging up my career. We should surely see some kind of downturn within the next decade. So hopefully the timing works there. But we’ll see. On big downturn will be both an opportunity and reality check.

      Thanks for the encouragement.
      -RBD

  5. A Frugal Family's Journey June 15, 2018 at 1:54 pm #

    We think part of the challenge for some is where they choose to live. For example, living on minimum wage in cities like New York and San Francisco only compounds ones ability to get off the rat wheel of living paycheck to paycheck. The key to wealth building is living on less than you make and thereafter saving and investment the rest. It is much harder to do if expenses are so high. Places like New York and San Francisco, because of the high cost of living, only dampens ones chances of getting off the rat wheel. 😉

    Thanks for sharing. AFFJ

    • Retire Before Dad June 15, 2018 at 2:33 pm #

      Where you live does make a huge impact. The problem is that many of the cheap places don’t have the jobs while the expensive places do in addition to all the other cool stuff. We still think about moving to achieve financial independence, but we are very happy where we are. So retirement will have to take a back seat.
      -RBD

  6. Dividend Diplomats June 16, 2018 at 5:54 pm #

    78% in an eye-opening number for sure. I think your article does an excellent job breaking it down, explaining why, and how you can try to break free of the cycle. I don’t have too much more to add to you points. It sucks and housing/where you live plays a component for sure, especially as the other commentors have mentioned. Expensive cities make it tough to achieve a higher savings rate, that’s for sure. But there are ways to try to make it happen. But some of that will require sacrifices in your current lifestyle, and that applies to anyone in any city they choose to live in. To break the cycle, you will most likely have to make some tough life choices that sacrifice something that you would like. Thanks for the great read today.

    Bert

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