Paycheck to Paycheck at Six Figures?
Inflation and economic events are straining earners across income brackets.
Do you feel like you’re struggling to find room between paychecks these days? You’re not the only one. A recent study conducted by LendingClub and PYMNTS.com showed that more and more Americans are living paycheck to paycheck—64% to be exact. This is a reported 3% increase from just a month prior, and a full 12% increase from April 2021.
Perhaps the most surprising part of this study is that even among the population of earners with an income of $100,000 or more, nearly half reported living paycheck to paycheck. That number has been on the incline over the past year.
In a recent press release, LendingClub differentiates between populations of earners living paycheck to paycheck but still able to afford their bills, and those living paycheck to paycheck but struggling to make ends meet. Interestingly, of the two groups, the press release reports that “the share of consumers living paycheck to paycheck but not struggling to pay their bills has seen the largest increase since October 2021, especially among higher-income consumers.” This 42% group is nearly double the 22% of earners who report struggling to afford their monthly expenses.
For those struggling to pay their bills, the impacts on savings and unplanned-for expenses were also examined. Unsurprisingly, those in higher income brackets reported higher savings amounts and more confidence in their ability to handle a $400 emergency expense.
LendingClub’s Financial Health Officer Anuj Nayar explains that “with inflation up 7.5 percent in the last 12 months, consumers of all income brackets are struggling to find a way to make ends meet.”
So what can you do if you fall into the growing population of those counting on every cent of their paycheck, at any income?
Consider Your Mindset
Living paycheck to paycheck can feel like an unending cycle where you are trying to make your funds stretch to cover expenses days before your next direct deposit hits the bank. Although there are some tried-and-true ways to get off the hamster wheel of feeling like you simply don’t have enough, start by considering your money mindset.
If you consistently think you don’t have enough money, you won’t. If you constantly feel overwhelmed or intimidated by budgeting, saving, or investing, you won’t make it a priority to do so each month because it all seems like too much to handle. In some cases, living paycheck to paycheck is perpetuated by these thoughts, leaving no motivation to improve the situation. Take some time to consider why these feelings persist, then commit to shifting your mindset away from not having enough.
Focus on Cash Flow
Once your mindset is in the right place, you can start the work of leaving the paycheck-to-paycheck cycle. That work begins with an often uncomfortable assessment of money coming in versus money going out, also known as your cash flow. First, add up your income from all sources, including paychecks, side gigs, social security, and other benefits. Most don’t find this task challenging. The hard work comes in adding up expenses.
It is easiest to start with required expenses, like rent or mortgage, debt payments, and utilities. Discretionary or desired expenses, like entertainment, dining out, travel, and shopping can be more difficult to add up. If you use a single account for these expenses each month, like a credit or debit card, go back to your online banking or statement for the last month and add up these costs. It may be helpful to repeat this calculation over several months, then find the average. This helps gauge what you are truly spending on the “extras” over a period of time.
To determine your cash flow, take the total expenses minus total income. If that figure is positive, you have a surplus each month. A surplus means that the feeling of living paycheck to paycheck is not your financial reality, but instead may be due to mismanaging the timing of paying your bills. Consider breaking up monthly expenses per paycheck, like paying bi-weekly for your rent or mortgage, car payment, or student loans, as opposed to a single payment during the month. This can help even out the money available to spend and pay expenses each pay period.
If you have a negative number after subtracting expenses from income, you have a deficit in cash flow. This means the paycheck to paycheck life is real, and there may not be enough coming in to cover what’s going out. Shifting a deficit to a surplus may require reducing expenses.
Start with discretionary expenses and see if there is room for reduction among those categories. Follow up by evaluating fixed expenses and what may be reduced there. This process may involve restructuring debt to get a lower payment, downsizing your housing, or eliminating unnecessary or expensive services. If these expenses have been reduced and a deficit still exists, consider what steps you can take to increase total income.
Create a Financial Plan
After calculating cash flow, creating a plan of action is often the most productive next step. Having a clear path forward and knowing the specific steps that need to be taken to do so is helpful in breaking out of the paycheck-to-paycheck cycle. A comprehensive financial plan does just that by encompassing several aspects of your financial life, from saving and budgeting to retirement planning and investment planning.
A financial plan is meant to work as a roadmap for how to get from point A to point B in your financial life. The process involves identifying your unique goals, like saving for a home purchase, building emergency savings, reducing debt, or retiring. Your cash flow is then used to help fund these goals, also referred to as buckets. When you have a cash flow surplus, those extra dollars are used to fill up each bucket, based on priorities and timeframes for achieving each goal. This is why doing the work of getting to a positive cash flow is a necessary preliminary step.
Filling up buckets as part of your financial plan can create a motivating force for freeing up some wiggle room between your paychecks. Ultimately, sticking with a financial plan can lead to more effectively achieving your goals over time.
Get Professional Help
If evaluating and improving cash flow, creating a financial plan, or sticking with a financial plan seem overwhelming or intimidating, know you don’t have to go it alone. A qualified, experienced financial advisor can help with the heavy lifting while providing invaluable guidance on how to get to your unique point B. The right advisor also offers accountability and support when financial goals or priorities shift. These can be incredibly helpful tools along your money management journey.
If you feel like you don’t know where to start or how to move forward in your financial life, get in touch with us today.