Unexpected Expenses Could Hobble Inflation-Weary Paycheck-to-Paycheck Consumers

Many pressures are putting a pinch on paychecks, the latest unwelcome arrival being runaway inflation that’s compounding a seemingly endless state of financial dismay for millions of Americans, including some of the highest earners in the nation — those making $250,000 a year or more.

Together with LendingClub, PYMNTS is chronicling the extent of paycheck-to-paycheck living among U.S. consumers, and the latest report is looking deeper into the causes behind barely making ends meet, even for those bringing in very high salaries.

“The New Reality Check: The Paycheck-To-Paycheck Report: The Financial Distress Factors Edition,” a PYMNTS and LendingClub collaboration, found that that nearly 6 in 10 (58%) of U.S. consumers were living paycheck to paycheck in May 2022, a 4-point increase from May 2021 that now includes nearly 1 in 3 respondents making $250,000 or more annually.

“Last month’s report was a real eye opener when it came out that a third of Americans earning 5x the national median income are living paycheck to paycheck. That shocked me,” Anuj Nayar, financial health officer at LendingClub, told PYMNTS.

That was part of the impetus for a survey focused on financial distress which found that nearly 150 U.S. million adults are now living paycheck to paycheck, “making it the most common financial lifestyle in the United States.”

“One of the things that struck me as we started breaking out the cohorts was the idea, specifically for those in the higher echelon, the $250K-plus, 39% of them said that one of the issues that’s making them move to paycheck to paycheck is paying for the expenses of another family member,” Nayar said. “That could be child. It could be a parent. It could be a sibling.”

With 59% of all U.S. adults living paycheck to paycheck it’s not unexpected to find high earners helping loved ones financially. What can be inferred, however, is that it’s pushing people who would normally be insulated from paycheck-related problems into the troubled zone.

Get the study: The Paycheck-To-Paycheck Report: The Financial Distress Factors Edition

Do the Math (Again)

It’s a sobering slap. “A year ago, when [people] heard the term paycheck to paycheck, they were thinking it’s low income, it’s subprime, all these people maybe in the lower income sphere. Actually no. It’s everyone. It’s all of us,” Nayar said.

The latest study in the series found that in the past three years, 38% of U.S. consumers have experienced a major life event that altered their finances, like retiring or moving, with 33% undergoing a serious setback event like job loss or major health problem.

It’s forcing consumers to get creative about lowering expenses, Nayar said, with more people willing to share expenses and make big lifestyle changes that conserve even small sums.

“I know a lot of people [who have] started cycling to work instead of driving,” he said “They’re like, well, it’s free and I’m getting a bit of exercise. It’s interesting that what’s driving them to do this isn’t the exercise part. It’s the $7.50 [per gallon] gas in San Francisco.”

Advice Nayar gives to those living paycheck to paycheck, struggling or not, tends to be around saving wisely — and borrowing inexpensively.

“In the same way that when the interest rates were low you refinanced your debt, mortgages or car loans, whatever else, to move your costs of borrowing down, now’s the time, if you’ve got any savings, to refinance your savings.”

Currently his company offers high yield savings accounts at around 1.26%. But Nayar noted that the picture could change as the Federal Reserve starts to raise the Federal Funds Rate, bringing making loans more expensive for consumers, too.

See also: 1 in 3 Consumers Earning $250K Live Paycheck to Paycheck

Credit: a Band-Aid, Not a Cure

Emergency expenses are another area where we see a universal issue with not much financial planning going into it, leaving millions unable to afford any sudden financial crisis.

He said, “You should be thinking about how to manage that at the beginning of the process versus what most people do, which is ‘I’ve got to spend the money, I’m going to put it on a credit card. I’ll deal with it later.’ Then you’re stuck in a hamster wheel of trying to pay that off.”

With the Fed raising interest rates and credit cards following suit, “This is the time to be thinking … how do I move before other rates change? How do I move from a very high interest credit card to something that’s a little more secure and fixed, like a personal loan?”

To be clear, Nayar said, credit itself isn’t bad when it’s used responsibly. The problem arises, he said, when consumers leverage themselves too much, and a proliferation of products from high-interest credit cards to buy now, pay later (BNPL) make it easy to get out of control.

Consumers look at installment credit and their perception, he said, becomes, “It’s not $150. It’s not $200. It’s four payments of 50 bucks. You can afford that. If you’re the kind of person who will take that down … and put [it] in [an] Excel spreadsheet knowing that on this date that money’s going to be coming out,” that person might fit an ideal instant credit profile.

Except, Nayar added, someone with that level of financial disciple, wherewithal and north star of spending responsibly is “probably not the person who’s using these products.”

As for those who do, “utilizing these credit products somewhat irresponsibly can really be damaging to your financial health,” he said. “It may take you years to get back on track.”

That’s why his public service announcement almost regardless of income level or savings is to “start your budgeting again, have a look at these things, make sure that you’ve really thought about what your everyday expenses are, put some money aside for the unexpected expense that’s going to happen, and feel free to use credit,” but do so responsibly.