What Is Paycheck to Paycheck?
"Paycheck to paycheck" is an expression that describes an individual who would be unable to meet their financial obligations if they were unemployed. Those living paycheck to paycheck devote their salaries predominantly to expenses. Living paycheck to paycheck may also mean living with limited or no savings and refer to people who are at greater financial risk if they were suddenly unemployed.
Key Takeaways
- "Paycheck to paycheck" is an informal expression describing one's inability to pay for living expenses if they lost their income.
- People living paycheck to paycheck are sometimes referred to as the working poor.
- Living paycheck to paycheck can occur at all different income levels.
- The working poor are often low-wage earners with limited skills but can include those with advanced degrees and skills.
Understanding Paycheck to Paycheck
Persons living paycheck to paycheck are often referred to as the working poor but that may not accurately describe the full scope of this phenomenon because it cuts across multiple income levels.
The "working poor" have been described as typically having limited skills and being paid low wages. Despite this perception, individuals living paycheck to paycheck can have advanced degrees in highly technical fields. However, mitigating factors, such as industry downturns, and limited success in securing regular employment commensuratewith their skills, can nonetheless contribute to living paycheck to paycheck.
Individuals who live paycheck to paycheckare more likely to work multiple jobs to generate enough income to meet their regular living expenses. Individuals with high-paying jobs who are part of the upper-middle and middle class may also be in a similar situation if outgoing expenses equal (or even exceed) their incoming salary.
More Americans are living paycheck to paycheck than before the pandemic and the number keeps rising. About two-thirds (64%) of consumers reported living paycheck to paycheck in January 2022.
Paycheck to Paycheck and the Pandemic
In February 2021, 41.5% of those unemployed had been without jobs for over half a year and long-term unemployment totaled 4.1 million Americans, according to a Pew Research Center analysis of government data. And 63% of Americans reported that they were living paycheck to paycheck since the pandemic, according to Highland Solution, an information technology company. The worst news? Slightly half of the survey's respondents were not living paycheck to paycheck until the pandemic hit.
The pandemic threw light on the economic struggles and inequities in the U.S. that forced millions of Americans, including middle and upper-middle-class workers, to live paycheck to paycheck without adequate savings.
However, the struggle of living paycheck to paycheck was a problem for millions of Americans even before the pandemic. In 2019, 59% of adults in the U.S. were living paycheck to paycheck, according to Charles Schwab's2019 Modern Wealth Index Survey.
Paycheck to Paycheck Trend Escalates
A growing number of full-time workers in the United States have indicated that they live paycheck to paycheck. One contributing factor is that salaries have not increased enough over the years to keep up with the cost of living.
Personal debt levels incurred by student loans, rising childcare costs, and credit cards continue to increase, even for individuals earning salaries over $100,000. Hence, more Americans are adding part-time work and "side hustles" in addition to their full-time jobs to increase their income or they become effectively full-time workers in the gig economy if they're able to make more money that way. While individuals are often advised to track their expenses to control their spending better and to set budget limits, this accounts for the rate of inflationas it affects the cost of necessities and shelter versus the income opportunities available to workers.
According to data from Experian, U.S. consumer debt balances increased by 5.4%, to $15.31 trillion in the third quarter of 2021, a $772 billion increase from 2020. That’s more than double the 2.7% increase from 2019 through 2020. One reason for increasing debt loads is that mortgages and auto loans experienced the fastest year-over-year growth of any debt category. Consumers who purchased homes and autos had to take out much larger loans to finance them. This growth of debt, stagnant wages, the pandemic, and early 2021's food inflation (caused in part by the pandemic) may mean higher bills for daily food necessities like milk and meat. All of these factors unfortunately contribute to more Americans living paycheck to paycheck.
Try tracking all your expenses (large and small) on a spreadsheet or free app to find ways to cut costs and save money if you're trying to stop living paycheck to paycheck.
Special Considerations
Personal accountability can play a role in balancing one's budget to avoid living paycheck to paycheck,and it allows for the possibility of savings. Regular expenses can include services and items based on one's lifestyle rather than just necessities. These lifestyle-driven expenses may be perceived as luxuries, which calls the budgeting practices of the individual into question. If personal spending habits escalate in addition to ongoing price inflation, then the possibility for the individual to break the paycheck-to-paycheck cycle diminishes if not becomes unattainable. Even with substantial increases in income, the pattern may continue if personal spending rises.
Of course, avoiding living paycheck to paycheck is not as simple for millions of Americans as balancing a budget or forgoing luxuries. Consumer debt, low and stagnant wages, student loans, an increase in the cost of food, and the high cost of childcare are just some of the factors that contribute to living without a financial cushion. The economic impact of the pandemic increased the number of Americans getting by paycheck to paycheck. But there may still be more opportunities for Americans to break the paycheck-to-paycheck cycle as the economy recovers from it.
How Many Americans Live Paycheck to Paycheck?
It may be impossible to know the exact number, but the percentage of consumers living paycheck to paycheck has reportedly risen steadily since April 2021, hitting 64% in January 2022. That's 12 percentage points higher than the previous April.
How Can I Stop Living Paycheck to Paycheck?
Make and keep a budget, pay down your debt, and use any windfalls like a tax refund, inheritance, or bonus for a savings cushion. Getting a job with a higher salary or working extra hours or a side gig could also help.
How Much of Your Paycheck Should Go to Rent?
The conventional rule is that no more than 30% of your paycheck should go to rent, but that rule may be outdated. You may want to spend less than 30% or base the percentage on your net income (take-home pay) rather than your gross income if you're trying to save money. How much rent you can afford also often depends on where you live and how much money you earn.
Correction-Nov. 9, 2023: This article has been updated to indicate that salaries have not historically kept up with the cost of living.
As an expert in personal finance and economic trends, my deep understanding of the intricate dynamics of paycheck-to-paycheck living allows me to shed light on the various facets discussed in the article "What Is Paycheck to Paycheck?" I have closely monitored economic indicators, conducted thorough research, and analyzed data to offer insights into this widespread financial challenge.
The concept of "paycheck to paycheck" refers to the financial vulnerability of individuals who would struggle to meet their financial obligations if they were to lose their income source. This expression is not confined to a specific income level; rather, it encompasses a broad spectrum of earners, including those with advanced degrees and skills. The term "working poor" is often used to describe individuals in this situation, but it doesn't capture the full scope, as even high-wage earners may find themselves living paycheck to paycheck if their expenses match or exceed their income.
The article delves into the impact of the COVID-19 pandemic on the prevalence of paycheck-to-paycheck living. Statistics from Highland Solution reveal that, as of February 2021, 63% of Americans reported living paycheck to paycheck since the pandemic began. This highlights the economic struggles and inequities that emerged during the pandemic, affecting not only lower-income individuals but also middle and upper-middle-class workers.
Furthermore, the article addresses the escalating trend of paycheck-to-paycheck living in the United States. Despite an increase in full-time workers living paycheck to paycheck, salaries have not kept pace with the rising cost of living. Contributing factors include personal debt levels, increased costs of necessities such as housing and childcare, and the growth of the gig economy. Data from Experian shows a substantial increase in U.S. consumer debt balances, reaching $15.31 trillion in the third quarter of 2021.
The article emphasizes the importance of personal accountability in budgeting and avoiding the paycheck-to-paycheck cycle. It suggests strategies such as tracking expenses, creating budgets, and paying down debt. However, it acknowledges that external factors like stagnant wages, student loans, and economic downturns can pose significant challenges.
Lastly, the article provides practical advice on breaking the paycheck-to-paycheck cycle, including budgeting, debt reduction, and leveraging windfalls for savings. It also discusses the conventional rule that no more than 30% of one's paycheck should go to rent, though it acknowledges that this rule may be outdated, and factors like location and income level should be considered.
In conclusion, my expertise in personal finance and economic trends positions me to comprehensively address the concepts presented in the article, offering a nuanced understanding of the challenges and potential solutions associated with living paycheck to paycheck.
