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Why do two-thirds of Americans live paycheck to paycheck?

It is a fact that more than 60% of Americans do live paycheck to paycheck. And this includes individuals and households that make over $100,000 a year. Let us not forget that people in that income bracket represent the top 25 percentile of all household incomes. Yet, people in that category as well as struggling to make ends meet. What is interesting is that the living paycheck-to-paycheck struggle has been used by politicians on both sides of the aisle to score political points. There are many reasons why people are living paycheck to paycheck, and it is preponderant to assess the fundamental reasons for the economic struggles of the average American.

Percentage of U.S. Adults living paycheck to paycheck

Source: PYMNTS

The expression living paycheck to paycheck refers to people who are unable to pay their bills if they become unemployed. Those who live paycheck to paycheck will nearly be out of money between paychecks and unable to pay for basic living expenses if they fail to receive their next paycheck. Between higher costs, declining purchasing power due to inflation, and a possible recession on the horizon, many American families feel financially under pressure. Indeed, the data show that 76% of U.S. adults making less than $50,000; 65.9% of U.S. adults making between $50,000 and $100,000; and 47.1% of U.S. adults making more than $100,000 are all living paycheck to paycheck.

Perhaps the most fundamental of all reasons why two-thirds of Americans are living paycheck-to-paycheck is that most Americans only have one source of income. This source of income is mainly earned income. It means an income earned from exchanging one’s time and labor for remuneration. For most Americans, earned income is tied to their employment. The issue with having only one source of income on which someone’s daily life depends is that once that income is cut, the income-earner goes under. This is because most of those who live paycheck to paycheck are employees; their income strictly depends on their employer; and they do not have multiple streams of income. This means that if their employer let them go, as has been recently the case in the tech industry, then they will have a hard time making ends meet.

The second reason, perhaps the most important, is that most Americans spend more than they make. We spend a lot and we spend, sometimes, on things we do not necessarily need. In this world where everything is subscription-based and readily available, it is easy to not really pay attention to what we are subscribing to, and get charged for it. The lack of adequate budgeting plays a massive role in most households’ inability to properly track their finances. For people making more than $100,000; it can be a very slippery situation because one may think that they earn enough income to not have to worry about anything. As a result, instead of reducing their expenses while enjoying a high income, they increase their expenses to match their lifestyle, and this leads them to spend more than they actually make. Even some of those high-income earners who do invest in assets do still live paycheck to paycheck because they do not adequately diversify their investments. They have a concentrated portfolio, which exposes them to great risks. If their investments go bust, they also go under. Our economy is credit-based. Banks encourage us to spend in order to stimulate the economy. And to spend as a means to stimulate economic growth, the buy-now-pay-later concept became extremely prevalent in our society. People do live in debt as they take loans for nearly everything whether it is to purchase a home; or a car; pay for their tuition, or to pay for a wedding.

The third reason why many Americans live paycheck to paycheck is because they do not put their “money to work.” Most people save their money, which totally makes sense, but they do not invest a portion of their money saved, into productive assets such as stocks, bonds, real estate, small businesses…etc, and diversify these investments. While saving is important, especially for emergencies, keeping money in the bank makes that money losing its value due to inflation. Having money tied to a couple of investments ensures that one’s net worth continues to appreciate as the value of those investments itself appreciates. This means that even if one were to lose his job, that person can still live off his investments to make ends meet.


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