Why Are So Many Of Us Living Paycheck To Paycheck?

Borrowing, Delinquency, Foreclosure & Eviction, Investing & Retiring, The Economy

Survey Suggests Economic Overconfidence

If the economy is so great and unemployment is so low, why do so many Americans live paycheck to paycheck? And why don’t we seem to care?

The February PYMNTS.com Financial Invisibles Report attempts to answer these questions, noting, “For three consecutive quarters, consumers have been optimistic about their financial futures – even while slipping further into debt.”

Results from the corresponding Q3 2018 survey suggest that we’re relying too much on credit – giving us false confidence in our financial outlook.

Overconfidence Rules

According to the survey, 38.8% of Americans thought they were in better financial standing compared to a year ago, with 43.3% saying they were in about the same financial shape – similar numbers to the first two quarters of 2018.

Meanwhile, delinquencies are on the rise. In Q3 2018, the number of consumers who missed a payment rose by one-third over the previous quarter, reaching 41.2% of respondents. Most delinquent consumers (36.3% of respondents) were far enough behind to have been contacted by a creditor.

How can both be true? Perhaps many Americans are upgrading to bad financial situations from really bad ones. However, other survey results suggest that we’re using credit as a buffer to kid ourselves and delay the inevitable.

You Know You Eventually Have To Pay This Off, Right?

The number of respondents using credit to pay for outstanding bills rose dramatically in Q3 2018, from 44.6% to 61.8%. We’re using credit as a standard payment method instead of as a temporary cash flow solution – ignoring accruing interest charges and squeezing future budgets.

In essence, too many Americans are using credit to free up more “space” in the budget for increased spending – or perhaps there’s no budget at all.

Still, many respondents understand the importance of financial education. Over three-quarters of respondents who had lived paycheck to paycheck in the past were either very or extremely interested in financial education programs. They’ve lived that way before and are determined not to do it again.

Are they determined enough to follow through on improved financial education? If so, can they put what they learn into practice? Will those who are still living paycheck to paycheck join them?

There’s certainly room for improvement – at all ages, incomes, or education levels.

Wealthy People Overspend, Too

Over half (51.8%) of respondents who live paycheck to paycheck said they did so to cover basic bills. Almost one-quarter (24.9%) cited unnecessary expenses, and a similar percentage (24.3%) cited a lack of income. All three of those things point to the same issue – too much spending relative to income.

Overspending hits all income levels. Over 50% of those living paycheck to paycheck with incomes below $100,000 cited covering basic bills as a reason. Slightly under 50% of those at the $100,000-$150,000 level used the same excuse for living paycheck to paycheck, as did almost 40% of those with incomes above $150,000. (Apparently, the definition of “basic expenses” changes with income.)

At least higher earners who live paycheck to paycheck know that they overspend. Nearly 44% of those earning $100,000-$150,000 and almost 60% of those making more than $150,000 highlighted unnecessary spending.

Perhaps the most surprising finding was how overspending affects higher income brackets. The survey compared sixteen different types of credit and financial services and found that the highest income category had higher denial rates than any other income group for well over half of these services, ranging from store cards to auto loans to mortgages. Even payday loan rejection rates were higher – illustrating that debt load and poor spending trends and habits are just as important as income when assessing risk.

If you make over $150,000 and your credit is so bad that you can’t even get a payday loan, you probably have a serious spending problem – but our American powers of denial are impressive. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.

Reassess your use of credit and see if you’re handling debt responsibly or you’re on the slippery slope toward a debt spiral.

The Takeaway

Anybody is capable of living paycheck to paycheck thanks to overspending, regardless of income.

A realistic budget is obviously important to lower-income Americans, but it’s also important to wealthier Americans. When you don’t bother to check or track your spending, it’s easy to lose track of the total. Debt can grow to unsustainable levels when you constantly postpone full payments through an increasing use of credit.

Without a budget that acknowledges and tracks debt, you’re unlikely to have a savings mentality and put a surplus aside for a rainy-day fund. Any leftover funds become just more to spend in the next month, while existing balances continue to rise.

If you’re not sure how a budget works, or need help managing your finances, there are plenty of educational resources available. Take advantage of them. Don’t assume that you make enough money to not care how you spend it.

In short, you’re never too rich or too poor to have a budget and stick to it.

If you want to reduce your interest payments and lower your debt, join MoneyTips and use our free Debt Optimizer tool.

Photo ©iStockphoto.com/samthomas

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