There are 17 songs on Napster titled “Paycheck to Paycheck.” I know because I’ve listened to them all. (You’re welcome.) These aren’t covers – each has its own lyrics, some of them pretty good. I like the version by a singer-songwriter named Darrell Bailey because it refers to economists:
Recession or depression
It all sounds the same to me
On TV the experts try to tell us
It’s temporary for you and me
But in the meantime there is no money
For the little man in the Land of the Free
When you live from paycheck to paycheck
The hard times, they come free
The lyrics of the 17 “Paycheck to Paycheck” songs are about backbreaking work, bad bosses and delinquent bills. They are about people who pass by, on the verge of failure.
Given the fact, what are we to make of the following statement? “Nearly two-thirds of the U.S. population — about 157 million adults — currently lives paycheck to paycheck, making it the most important financial lifestyle in the United States.” That’s from June report by the lending marketplace LendingClub in partnership with PYMNTS.com, a payment data company. A third of people who make $250,000 a year or more live paycheck to paycheck, says the study, which was based on a survey and government data.
What the LendingClub report tells me is that we don’t have a good, agreed upon definition of what a living paycheck really means. If its definition includes nearly two-thirds of Americans, I’d say, just looking around, that it’s too broad.
For example, let’s say you have a high income, but you throw money every month into a 401(k) plan for your retirement and a 529 plan for your children’s education. You spend money on vacations, clothing, restaurants, home renovations. On average, these expenses absorb all of your monthly salary. By one definition, you live paycheck to paycheck, but you could repay these expenses if you needed to.
It seems to me that “paycheck to paycheck” should be reserved for people whose monthly nut — unavoidable expenses like rent or mortgage, utilities, gasoline, and food — consumes everything they take home. One major emergency expense, such as a transmission repair or hospital bill, can break them.
Other studies have produced different results, generally less dire. MagnifyMoney, part of LendingTree, conducted a survey this year that: found it “50 percent of working Americans say they live paycheck to paycheck, meaning they’re out of money after all expenses are paid.” WTW, a benefits consultant, said in June that “of workers earning $100,000 or more, the number of workers living on paychecks doubled from 18 percent in 2019 to 36 percent this year.”
It is clear that the research methodology and the research question matter. The Bank of America Institute says in a July 19 report that the percentage “doesn’t seem as high as some headlines” bringing the figure above 50 percent. The institute says that for all income groups, the proportion of spending that is discretionary is more than 60 percent: “This usually implies that while some people live paycheck to paycheck, they may still have room to reduce their discretionary spending if they need that.” (That discretionary share sounds high to me, but I get the idea.)
Curiously, the Bank of America Institute found that customers with an annual income of $250,000 or more most likely to have an inflow into their accounts that is 15 percent or more less than the outflow from their accounts. That is based on anonymized data from 40 million bank accounts for the first three months of this year.
Wealthier people who spend more than they can from their bank accounts are likely pumping money into brokerage accounts and mortgage payments, building up home wealth. They can receive bonuses at times other than the first quarter, the institute has investigated. And because they are older on average, they usually have savings built up to take advantage of, David Tinsley, a senior economist at the institute, told me.
The good thing about the Bank of America Institute data is that it is plentiful and objective, unlike surveys, which cover fewer people and are necessarily subjective. The annoying thing is that you cannot always see from money flows why people do what they do and how they experience their own situation.
Surveys have a valuable role, and they are better if they ask objective questions. I like the Federal Reserve’s annual survey, which asks people how they would pay for an unexpected $400 expense. The stock that said they’d back it with cash or its equivalent — an indication of financial strength — has risen steadily, from 50 percent in 2013 to 68 percent last year.
People’s ability to cover unexpected costs grows when you give them a little more time. Fifty-five percent of American adults say they could “definitely” make $2,000 if an unexpected need arose within the next month, according to an annual report. questionnaire by the TIAA Institute and the Global Financial Literacy Excellence Center. That’s more than just a quarter who it said in the financial crisis year 2009.
Annamaria Lusardi, an economics and accountancy professor at George Washington University who co-directs the survey, told me that financial fragility is a serious problem in the United States, as the “salary-to-salary” surveys show. “I think we should still be alarmed,” she said. “Finance is getting very complicated. It becomes difficult to make those decisions and very easy to get into trouble. There are so many opportunities to get into debt and spend money. And there are very few to save.”
Or as singer Darrell Bailey told me when I reached his home in Greenville, SC: “I lived hard growing up. I know what it’s all about with nothing to eat in the house but sugar. I always got up and went to work. I have lived on both sides. I’ve been working since I was 16. I’m 53 now. You just pray for people who are having a hard time. All you can do is go out and make a living every day.”
The readers write
As for your Wednesday newsletter regarding the Federal Reserve Bank of Cleveland’s efforts to make better estimates of gross domestic product, you wrote, “Think of their method as merging two wristwatches into one.” But as you noted, it wasn’t just the two wristwatches that put them together – it was those and other timekeeping devices (if they’re smart about it, any other clock or sundial or hourglass they can get their hands on). As one of my colleagues likes to say, “There is no such thing as useless information. There is only information that is more or less reliable.”
August P. Lowell
Durham, NH
Quote of the day
‘The greatest danger, that of losing yourself, can pass as silently as if it were nothing; any other loss, that of an arm, a leg, five dollars, a woman, etc., will surely be noticed.”
– Soren Kierkegaard, “The Sickness to Death” (1849; translated by Walter Lowrie from Danish, 1941)
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