Embrace Living Paycheck to Paycheck

Earlier this month I saw a news story tickler that truly shocked me when I first read it.  According to a recent survey conducted by Pymnts.com and LendingClub Corp, more than one in three Americans who earn at least $250,00 annually say they are living paycheck to paycheck. Whoa!  According to US Census Bureau data, the $250k and above income bracket approximately represents the top 5% of earners in the US.  The survey also suggests that the total percentage of Americans reporting living paycheck to paycheck is up to 61%, up nine points from April 2021.  So, it’s not just the high earners among us who are leading paycheck to paycheck lives.

This story was picked up by several sites, including Bloomberg, and runaway inflation was often cited as a primary driver.  There is little doubt that the high inflation we’ve experienced over the past 12 months is having an impact on household finances.  Housing costs suck up a larger percentage of our monthly expenses than ever before.  Supply chain challenges continue to make other things we buy both scarce and expensive.  It’s depressing to watch the gas pump roll big numbers every time I fill up.  However, it seems to me that we can’t only blame inflation for the recent increase in people living paycheck to paycheck.  The nine-point increase from last April seems like a good approximation of inflation’s impact. I suspect there’s more going on here than meets the eye.

What does “living paycheck to paycheck” mean?

Traditionally, the term “living paycheck to paycheck” refers to those who spend all their income on financial obligations each pay period.  In some cases, it might mean spending more money than is earned through the use of credit cards or other means of borrowing money.  Often when the term is used, it’s used to indicate that an individual doesn’t have sufficient savings to meet unexpected events that will require money.  When I hear that someone is living paycheck to paycheck, my first thought is that the individual might be at some financial risk.  That consistently “making ends meet” might be a monthly or even weekly challenge. 

With that definition in mind, it makes the idea that one third of high earners are just covering their financial obligations even harder to fully grasp.  As I alluded to earlier, inflation certainly plays a role here.  Prices are rising a rate not seen since the 1980’s.  However, folks who earn more than $250k  each year ought to have a greater capacity for absorbing higher prices in the short-term versus the other 95% of the working population. 

So more broadly, what prevents us from saving money?  How can we avoid spending every last dollar earned each month?  How can we make better money choices for the long-term?  I believe one answer to these questions is that we ought to tie our money decisions to our goals and life plans.

What do we want?

Deciding what we really want is a deceptively hard question to answer.  I was recently asked what I want to get out of writing this BLOG.  Share what I’ve learned?  Have fun writing again?  Try to make some money eventually?  My snap answer is that I started blogging to share things I’ve learned and have some fun doing it.  The honest answer is really some blend of all three.

In late 2010, I faced the “what do I want” question on a much larger scale.  I had the good fortune of earning a new role at work that came with more responsibility.  It also came with a non-trivial increase in compensation.  Anticipating the new money became the catalyst for putting a life plan together.  What did we, as a family, want to do moving forward?  I freely admit that my wife and I didn’t consult our children who were 8, 6, & 4 at the time.  We might have be caring for pony and maintaining a swimming pool if we had.  Likely I’d still be working too.

Perhaps because we didn’t give the kiddos a vote, our plan started to form around the ludicrous idea of me retiring by age 50.  Time zero for our plan began with us just having purchased a new home using a 30-year mortgage, ~$500k invested for retirement (nearly all in 401k/IRA accounts), and a mediocre sense of where and how we were spending money.  A good starting point – just a directionless one.  I certainly wasn’t on a path to retire in ten years.  I’m a planner by nature and by vocation.  It just took me sixteen years into my career before it occurred to me to put a plan in place for my own life.

Planning to be clear

The lesson here isn’t to wait for a big promotion or some other monetary windfall to land before deciding what you want.  We can all start to set some goals and put together a changeable, flexible plan to achieve them. I certainly wish I had started to be more intentional with what I wanted earlier.  When we are clearer with what we want, we can figure out what it will take to get there.  When we have some knowledge of what it will take to realize our goals, we can then make choices that are aligned with what we really want.

Make choices that support goals

Far be it for me to disparage ponies and pools. There are things for sale that help make life fun and ponies and pools are at the top of the list.  And if what you want is a life filled with these things, fantastic!  You can still be clear and honest with yourself (and your “team”) by building personal goals that support your desires. Getting clear on goals is an important place to begin.  Making ongoing choices that support your goals is even more important.

My wife and I not only aligned on a retirement timeline goal, but also that we wanted to prioritize traveling with our family over buying more “things”.  We also did not want to take the full 30 years to pay off our mortgage.  At this point I was ready to start figuring out what it would take financially. To cut to the chase [spoiler alert], we needed to get tighter with our money.

Specifically, we needed to:

• Choose a dollar figure to aim for if retirement at age 50 had any shot of happening.  I created my own spreadsheet to make projections and used a retirement planning tool from Fidelity that uses the Monte Carlo simulation (I briefly covered the idea of retirement planners in this past post).  We settled on $2.5 million as the target – ridiculous number but something to start working toward.
• Track spending more closely.  We initially didn’t track every expenditure super closely but started by being precise on the big categories of spending and the total. (I wrote about creating a budget and included a simple template in this past post, if you’re interested in reading more).
• Allocate more of our monthly “MUST PAY” expenditures for retirement savings.  From the start of my career, I automated maximum 401k contributions. But doing the math, it was obvious this was not going to be enough to meet our goal. 25% of gross income became the saving target. Why this figure?  Again, it seemed to fit the overall goal and felt doable with other trade-offs we were willing to make. I never found a magic formula to provide the “right” answer.
• Dedicate some of our money to early principal payments so we’d move faster in eliminating our mortgage.  You can debate the merits of using money to pay off a low interest rate mortgage – especially through the amazing stock market run over the past 10 years (let’s pretend this year isn’t happening).  But this goal was more about creating a secure feeling and eventually getting rid of the biggest expenditure most of us face.  Along the way there was a refinancing down to a 15-year mortgage, a lower rate, and extra principal payments.  We finally achieved  this goal last year – no more mortgage!    

Trade-off choices are required

The above choices meant that we weren’t going to spend money elsewhere.  We don’t have a pool nor are there any ponies at our house.  We’ve put off buying new cars until absolutely necessary. Home “improvement” projects have pretty much been kept to the essential preventative maintenance . Putting our ongoing money decisions in the context of our plan has helped to avoid making choices that run counter to what we say we want.  Had we done this planning earlier in my career, we might not have bought that timeshare which doesn’t seem like a very sound choice to the benefit of our goals and with 20/20 hindsight.

I want to be clear that I’m NOT advocating that my goals and subsequent choices are the best or right for everyone.  What I am saying is that money is a resource for living life.  Being clear on what you want out of life and how your resources get used to live it is beneficial in making good money choices – period.

Embrace living paycheck to paycheck

Coming full circle, it occurs to me that maybe I’ve actually been living paycheck to paycheck for some time now. Just not in the way it is usually judged. I mention above that “living paycheck to paycheck” refers to those who spend all their income on financial obligations each pay period.  What if we’re able to align our money decisions with our life goals in a way that we really do “spend” all of our income each month – and it turns out to be a good thing?  Saving money is, in effect, paying ourselves.  Whether we’re saving for retirement, pools and ponies, or some other goal, we can ensure there’s a purpose for each dollar earned and spent.  This became clear once we started to pay our future selves in a disciplined way.

Saving for retirement, or anything else, requires persistence and time.  I’ve also been fortunate and extremely lucky.  Our in-earnest planning took place during a period of historically robust market returns.  My father-in-law always tells me that sh*t will do for brains when you have luck.  Not clear to me why he’s always telling me that, but hey, I’ll take the wisdom and pay it forward :).  To mangle another adage, “ambiguity is the devil’s workshop”.  No doubt idle hands do irresponsible things (like writing a blog), but it’s really a lack of clarity that gets many of us in trouble.  Knowing what we really want is crucial if we’re ever going to get there.   

My hope is that maybe some of the people who responded to the survey have a modified view and have truly worked to embrace living paycheck to paycheck in a way that is consistent with their life goals. Maybe we can all embrace this idea!

Written by: A. Reed Reviewed by: B. Holman