More than half of Americans live paycheck to paycheck, even the wealthy feel the heat of ongoing inflation

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Striving to save can be a challenge, but more and more consumers calculate their monthly expenses and discover that they have nothing left to save anyway.

A recent study shows that 58% of Americans reported living paycheck to paycheck in May, up from 54% the same month last year. Of those earning between $50,000 and $100,000, about 62% got stuck in this cycle.

But it’s not just low-income groups that are struggling to pay the bills, according to the report by payment and commerce platform PYMNTS and personal loan website LendingClub.

Taking even the researchers by surprise, 30% of people with incomes of $250,000 or more also lived paycheck to paycheck.

Anuj Nayar, Financial Health Officer at LendingClub, told Matt Nesto of PYMNTS that this was “a true revelation.”

“A year ago, when [people] they heard the term paycheck to paycheck, they were thinking it’s low-income, it’s sub-prime, all these people maybe in the low-income sphere. Not really. it’s everyone. We are everyone,” says Nayar.

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Paychecks are going up, but so are prices

There have been many reports of wage gains over the past year; however, they have not kept pace with costs.

Nearly half of all paycheck-to-paycheck consumers say their paycheck only covers basic expenses, while some higher-earners say paying for a family member has been shown to be a major contributor to financial hardship.

This means there is little left at the end of the month for discretionary spending or savings.

And what remains is also being eaten away by record inflation. The Consumer Price Index from the Bureau of Labor Statistics shows that inflation hit a blistering 9.1% in the month of June.

Food at home increased more than 12% during the year, while gasoline soared almost 60%.

And while July’s 8.5% inflation rate was down from June’s 9.1%, a month of moving in the right direction isn’t enough to stop the pressure, Federal Reserve Chairman Jerome Powell said. He added that this was not the time to press “pause” or “stop” inflation measures.

In July, the Fed raised the fed funds rate 75 basis points to 2.25-2.5%, the second rise in as many meetings.

If Powell’s brief speech in late July is anything to go by, a September hike is likely, which could push the rate above 3%.

COVID encouraged bad spending habits

While low-income people are bearing the brunt of the effects, some middle- to upper-income people are also struggling.

“I think COVID has warped everything financially,” says Rod Meloni, business editor for Local 4 News in Detroit and a certified financial planner.

Many consumers who were still employed during the pandemic were able to use the time to pause some of their usual spending. For example, remote workers saved a lot on gasoline, work trips and lunches out.

But, Meloni replies, that doesn’t mean they put all that money in savings. Many took it as an opportunity to spend on other things.

As the PYMNT study shows, people’s savings have also taken a hit over the past year. For those struggling to pay their monthly bills, their average savings plummeted from $4,065 in May 2021 to $2,464 in May 2022.

And the end of restrictions and closures this year has also encouraged people to spend big to make up for lost time, causing spending on travel, dining out and other activities to rise.

“I think we’ve gotten out of the habit … of being intentional about what we’re going to buy,” explains Meloni.

“And then when inflation goes up and gas prices go up and groceries go up unexpectedly, all of a sudden now, you have no discretionary spending left because you haven’t planned for it.”

The problem is getting more pressing

Meloni believes part of the problem may be a lack of financial education for the portion of paycheck-to-paycheck consumers whose wages comfortably cover basic expenses: Some people see overspending as the limit.

“I don’t think it’s anyone’s fault, necessarily. It’s just that we have to get through [financial literacy] in. And one of the biggest problems is that I think a lot of parents don’t know that.”

He suggests that people write down how much they spend each month and compare that number to the amount of money they have put in. One of the best pieces of advice Meloni has ever received was to set aside 20% of her income as savings.

And for those who earn more than enough to meet your billsit’s time to think longer term.

“I think the notion that you have unlimited discretionary spending should be dispelled,” says Meloni. “I call it the hamster wheel…because the faster you spin the wheel, the further you don’t go.”

Getting out of the hamster wheel requires some planning. One of the best tools to help break the pay-by-pay cycle is simple: creating a budget.

Budgeting for three to six months of expenses is key to preparing for emergencies like unexpected job loss, says Meloni.

And there’s no better time than ever to take this on, with talk of a recession on the horizon.

“I think we all need to start preparing for what’s coming…it’s absolutely going to get tough,” says Meloni.

“And the only way to weather that storm is to gain control, understand what you have, what you need, and then come up with a battle plan to deal with it.”

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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