3 Fundamental Issues and Opportunities of Living Paycheck to Paycheck

by Kevin on April 30, 2014

The Brookings Institute has an interesting study about living paycheck to paycheck.

The study shows that 38 million American households (about 33% of all American households) live paycheck to paycheck. That’s 38 million families with no savings, little to no assets, and no financial cushion to catch them when things go wrong.

Authors of the study were a bit perplexed to learn that of those 38 million households, 66% of them aren’t poor by definition. They are middle class families with a median income of $41,000 per year.

Yet they still live check to check. One financial catastrophe is all it would take to ruin them financially.

Of course the study doesn’t dive into¬†why these families are living hand-to-mouth, check by check.

3 Reasons Families Live Paycheck to Paycheck

Here are three core reasons that families live on the brink of financial ruin:

Spending Problem

Spending money like it grows on trees will land you in paycheck to paycheck land every single time. Americans are enamored with paying for stuff with monthly payments. Add up enough monthly payments to eat your paycheck and you quickly have a problem.

We’ve got the house we stretched financially to buy. The garage of that house holds two cars we are still paying off. We even bought our furniture on 18 months of 0% interest payments. The list goes on and on, payment by payment, eating away at our income like a virus.

What’s sad is many times our paycheck to paycheck lifestyle is a self-inflicted wound.

Unexpected Bill Problem

Of course not every situation is the result of poor spending discretionary spending decisions. There are times when an unexpected bill pops up that is so big that the payment to pay it off immediately puts us into paycheck to paycheck land.

It might be a medical bill, a roof that needed replacing, or an HVAC unit that died in the middle of the summer. All are serious problems that need to be addressed quickly and the fixes are costly.

Income Problem

Our spending — discretionary or unexpected — isn’t always the issue, either. Sometimes we truly do have an income problem. The other 33% of our paycheck to paycheck population (about 12.5 million households) are poor. Their median income is $21,000 per year and they have no assets to fall back on. Making a median of $10.09 an hour definitely makes it difficult to do anything financially.

3 Opportunities to Overcome Paycheck to Paycheck Living

Let’s consider these three opportunities in contrast to the issues above:

Stop Spending

Seems pretty simple, right? Stop spending your discretionary money and you will automatically be better off.

It isn’t always this simple. Often we have locked ourselves into long-term contracts that will take a while to resolve. For example, you could try to sell the car you are making payments on but the odds of your generating enough profit to buy a vehicle without payments is slim-to-none.

Nonetheless you have to push forward in cutting spending. Cut everywhere you can to give yourself a little breathing room each month.

Build an Emergency Fund

After cutting back on spending it is time to deploy the money you were wasting into something productive like an emergency fund. Having money set aside in a savings account for the sole purpose of dealing with financial emergencies will smooth out your financial journey.

You can’t build up an emergency fund without having money leftover at the end of the month to dedicate to this purpose. Start small. No matter the amount just stick it away for a rainy day, untouched until needed.

Grow Your Income

The last critical piece of getting out of paycheck to paycheck living is to grow your income. Getting a better job, starting a side business, or selling stuff you own on eBay are all options to help inch you away from living on the brink of financial ruin.

None of these tasks are easy, but an uptick in your income automatically pulls you away from the brink. The more you earn without increasing your spending levels the better off you become.

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