On this website, I’ve often challenged the prevailing notion that the economy is booming and everyone is going to retire a millionaire. That happy narrative seems to apply to only a very narrow slice of the population. According to a 2017 CareerBuilder survey, 78% of US workers live paycheck-to-paycheck. What’s more, the survey reported that one in 10 workers making over $100,000 also live paycheck-to-paycheck.
Clearly there’s a disconnect between the predominant media happy talk, and what the average American is experiencing.
In many quarters, people who live paycheck-to-paycheck are blamed for that lifestyle. Sometimes that’s true. But in the majority of cases, it’s the imbalance between incomes and the real cost of living. I think that even extends to people making over $100,000 per year.
Let’s attempt to delve into why people live paycheck-to-paycheck, and how you may be able to get out of that cycle if that describes you.
The Income Dilemma
According to the Federal Reserve, the median household income in the US was $59,036 in 2016. Seeking Alpha reports an almost identical number for January 2018, but doesn’t cite the source. So, let’s go with $59,000.
According to the US Bureau of Labor Statistics, the median weekly wage is $881 as of April, 2018. On an annual basis, that’s $45,812.
Now there’s an important distinction here. That’s the median wage reported by the BLS is for full-time workers. That covers just over 113 million workers. That doesn’t include median wages for the more than 30 million part-time workers as of June, 2018. In other words, nearly a quarter of the workforce isn’t earning anything close to the median annual income.
Add to that the statistical reality that 50% of full-time workers are earning something less than the median wage for full-time workers.
When you add that 50% to the 25% of the population who are employed part-time, plus those who are unemployed, you get a number that comes shockingly close to CareerBuilder’s 78% of workers who live paycheck-to-paycheck.
The Cost of Living Dilemma
It can be difficult to determine what the median household cost of living is. But we can look at four major expenses – housing, auto expense, income taxes and healthcare – to find data that easily supports why so many people live paycheck-to-paycheck. These four major expenses are, after all, the categories that virtually determine status in the middle class.
This is an incredibly diverse expense, that will vary based on where you live, how large your home is, whether you own or rent, as well as the number of people in your household. But just for simplicity, let’s look at monthly rents as a rough guideline.
According to the website ABODO the median national monthly rent is $1,252 for a two-bedroom apartment. The two-bedroom number is probably a fairly accurate measure, as something of a halfway between one-bedroom and three or more. After all, not all households are families.
By using $1,252 as a rough measure of median housing costs, we come up with over $15,000 per year for housing. I don’t know if that number includes utilities or not, but let’s keep it simple.
For simplicity sake, we’ll just use numbers put out by AAA. They report the cost to own and operate the average car is just under $8,500 per year. I’ve crunched the numbers on this a few times, and it’s pretty accurate. Assuming the average household owns 1.5 vehicles, we can increase that number by 50%, which comes to $12,750 per year for median auto expense.
This is another number that has wide variations per household. But as a convention, let’s estimate numbers based on the median household income of $59,000.
Let’s start with Social Security tax, or FICA. It’s 7.65% of an employee’s income. If you’re self-employed, it doubles to 15.3%. But let’s go with 7.65%, once again to keep things simple. Applied to the median household income of $59,000, the FICA tax comes to just over $4,500.
Again to keep it simple, let’s just assume the median household pays 10% in income taxes. It’s a combination of both federal and state income taxes. That’s $5,900.
Total income tax bite for a household earning the median income: $10,400 per year.
Healthcare costs are probably the biggest variable in the average household budget. I suspect it’s a major reason why so many people live paycheck-to-paycheck. It’s actually quite difficult to distill how much the typical household spends on health care. For example, health insurance premiums vary in cost from one region to another, but also by the type of coverage you have and the size of your household.
Those who have an employer plan usually enjoy a subsidy paid by the employer, though it almost never covers the entire premium. But those who are on private plans are on the hook for the whole amount. We can only guess what the average household pays just in health insurance alone. A 2017 article from CNBC reported the average monthly premium for individuals was $321, and $833 for families. That was for 2016. Those numbers are certainly higher in 2018.
Looking at the number for families, $833 per month is $10,000 per year. If it’s an employer plan, and the employer’s paying 60%, the family’s paying $4,000.
The same article from CNBC also reported that the average deductible was $4,358 individual plans, and $7,983 for family plans. Now let’s estimate the typical household spends about half that deductible in any given year. That’s nearly $4,000. When added to the employee paid portion of health insurance, at $4,000, the total is $8,000 per year.
Putting the Big 4 Expenses Together
Now that we’ve determined ballpark figures for the four primary household expenses, let’s total them up:
- Housing expense, $15,000
- Auto expense, $12,750
- Income taxes, $10,400
- Healthcare costs, $8,000
- Total: $46,150
Now after subtracting more than $46,000 from the median household income of $59,000, we’re left with just $13,000. That’s what’s left to cover everything else. That includes food, clothing, cell phones, Internet and cable, life insurance premiums, parking tickets and fines, education, and entertainment.
After paying all of those smaller, but still necessary costs, exactly how much is left over for savings?
That easily explains why the vast majority of US workers live paycheck-to-paycheck. We can look at income numbers all day, but until we measure them against real world living expenses, they’re completely meaningless.
So yes, 78% of workers live paycheck-to-paycheck here in the “richest country in the world”. And contrary to popular belief, it isn’t because of excess spending in most cases.
The High Income Dilemma
On the surface, this seems like a contradiction. After all, anyone making that kind of money should be saving a big chunk on a regular basis.
I generally agree with that position. However, often overlooked is that workers making over $100,000 are concentrated primarily in urban areas. More particularly, they’re most heavily concentrated in the highest cost cites, like New York City, San Francisco, Boston and Washington DC.
But these cities are well known for two things: high incomes, and a very high cost of living.
It’s that second part that smacks a lot of people in the $100,000+ class. The reality is that in the most expensive cities, earning in the low hundreds puts you much closer to the bottom of the economic pack than the top.
I’m sympathetic to this dilemma. The New York suburb I grew up in, which at the time housed mostly working-class families, has undergone a complete price transformation. I was shocked recently to discover the median price of a house in the community is $800,000.
Now if you’re thinking that’s exceptional, it’s not in that particular area. There are scores of cities and towns in the immediate area where prices like that are the norm. Some are even higher. Much higher. (The town next door is $1 million+.)
The point is, someone making in the low hundreds would necessarily struggle to afford to live in that seemingly ordinary town. It’s happening in high cost metropolitan areas across the country. Prices get that high, because more affordable housing is zoned out by local communities. That means if you want to work in the area, and earn the “high salary”, you have to pay the cost to live there.
And yes, you very well might struggle.
Creating a Strategy to Get off the Paycheck-to-Paycheck Treadmill
It’s fashionable among some to assume this income/cost of living dilemma will eventually be solved with political solutions. I highly doubt it. Given the political paralysis in Washington DC, and the lack of any national consensus, top-down action is highly remote. In fact, it’s even worse than that. It’s the very political actions of the past 20 or 30 years that brought us to the crisis point were at right now.
I make that point to emphasize that we are all on our own – as usual. The only solutions will come at the individual or local level. There’s no point in wasting time and energy holding out for political solutions that will never come. That strategy has failed miserably thus far. What also seems clear is that the income/expense gap is NOT a temporary phenomenon. It’s been growing at least since the 1980s. We have every reason to believe that it will be the way of the future.
So what can we do to reverse the trend toward living paycheck-to-paycheck in our own worlds?
Gradually begin detaching from the suburban lifestyle
This lifestyle attachment is not only becoming prohibitively expensive, but it’s also creating undue stress as people try to “keep up” against increasing odds.
The time has come when the bottom 90% need to investigate and consider implementing alternative lifestyles.
This may take the form of shared housing. It may not be a perfectly comfortable arrangement, but since housing is a controlling expense, lowering it is absolutely critical.
Other strategies: buy a house with income potential. That can include a rental unit, capability to take in one or two boarders, or even capacity to run a small business. And whether you decide to buy or rent, make sure the cost is LESS than you can comfortably afford. The less you spend on housing, the more you’ll have available for everything else.
At the extreme, even give serious consideration to going partially off the grid. It’s not possible or practical to go fully off the grid, but anyway you can lower dependence on costly systems will give you more control over your finances.
The noose is pretty tight here in that options are very limited. If you don’t have an employer-sponsored plan, and the plans available on the health insurance exchanges are too expensive, look into part-time jobs with health insurance.
Another option, if you can qualify, are Christian health sharing ministries, like Medi-Share. It’s not health insurance strictly speaking, but it works the same way. The premiums are usually less than half those of traditional health insurance, and it’s considered fully ACA compliant.
There may actually be more options to lower costs here than the other categories. The first is the most obvious – pay cash for your car. Not only will that eliminate the monthly payment, but it will also ensure you’ll buy a car that you can actually afford.
Also consider either learning to do some basic car repairs on your own, or find a good good backyard mechanic. Believe me, they’re out there, and we’ve use them to save many thousands of dollars over the years. Repairs are a major part of car ownership costs, this is an area where you can save a lot of money.
Here’s a more radical strategy: not owning a car at all. If you live in an urban area, chances are there’s mass transit. In suburban and urban areas, Uber and Lyft go everywhere. And in both situations, you can consider having a good bicycle as a supplement.
A variation on that theme is to drop down to one car per household. For example, my wife and I make do with one car. It’s not always convenient, but we save a lot of money with the arrangement.
There’s not a whole lot of flexibility here, since income taxes are statutory. There are even fewer options since the 2017 tax reform bill essentially eliminated most itemized deductions by increasing the standard deduction.
But one option that is still available is retirement plan contributions. This will not only help you to lower your tax bill, but it would also get you moving on the way toward financial control. Having a growing long-term nest egg is one of the best ways to get off the paycheck-to-paycheck cycle.
And don’t let the “I’m too old” argument keep you from saving for retirement. No matter how old you are, anything you save retirement is better than nothing.
A more radical strategy on the tax front is to create a side business for at least some of your income. The business will enable you to write off certain expenses, even including the use of some space in your home.
This strategy also has a bonus. The same business you start and operate in your working years can become a valuable income supplement in the retirement years. Also, if you run it as a side business, it may be a valuable source of additional income to dedicate toward saving money.
Putting it All Together – And Breaking the Cycle of Living Paycheck-to-Paycheck
What we’ve been discussing so far is a twin strategy of reducing your cost of living – in some cases radically – and increasing income. But the critical third point is what you do with the additional cash flow.
It must be saved.
Once you create extra room in your budget, you should direct it toward contributions to a retirement plan and into an emergency fund. The emergency fund will insulate you from short-term financial problems, while the retirement plan will provide a measure of protection for the long-term (and get you a tax break).
You may be tempted to spend the extra money on other living expenses. Don’t. If you’ve never been a saver, you’ll need to master breaking the savings barrier. There are various strategies to do this, and you need to pick one and run with it.
Once you do, you’ll get off the paycheck-to-paycheck treadmill, and see your financial situation beginning to improve.
You can’t do anything to help the other 78% of workers who live paycheck-to-paycheck. But by reorganizing your life and your financial situation, you can remove yourself from the group. And that’ll be a definite step forward.
Do you live paycheck-to-paycheck? If so, what do you believe is keeping you there? And if not, how have you gotten off the treadmill?