The latest economic data is in, and the Consumer Price Index shows that inflation has picked up to its fastest pace in several months.
Amber Carroll, senior vice president of membership and lifecycle strategy at LendingClub, observed that nonessential spending in the paycheck-to-paycheck economy is ripe for further examination as consumers gear up for the holiday shopping season.
As joint research by PYMNTS and LendingClub showed, in an environment where more than 60% of the population lives paycheck to paycheck, “we’ve also seen a bit of an uptick in people reporting that it’s getting more challenging to pay their bills,” Carroll said in a discussion of consumer spending and sentiment.
According to Carroll, “lifestyle creep” has become a real concern. Not long ago, we were all stuck inside amid the pandemic, gasoline was a minimal expense (we weren’t going anywhere) and savings cushions were built up significantly. Now, those cushions have been deflated in the face of rising prices.
Consumers are re-examining their nonessential spending to grapple with inflation and the challenges of managing the daily household budget, said Carroll. The latest “Paycheck-to-Paycheck Report” found that 2 out of 10 paycheck-to-paycheck consumers cited nonessential spending as one of the reasons they are living paycheck to paycheck. Nearly a third of the Generation Z cohort said that nonessential spending led to their paycheck-to-paycheck status.
“If we were to translate those numbers to the broader market, that would mean that 13% of adults are saying that nonessential spend is causing them to live paycheck to paycheck,” Carroll said.
Those same consumers are participating actively in the economy and are splurging at the grocery store, buying candy and soda, or buying health, beauty or clothing goods at retailers. Travel spending and dining out remain resilient, although those preferences are more prevalent among those not living paycheck to paycheck.
The definition of “essential” spending varies by consumer and even by use case.
“The line can be a bit blurry,” observed Carroll. She noted that travel can become essential in an emergency when once it might have been viewed by that same consumer as a luxury. Eating out or food delivery becomes essential when you’re a household with two working parents, kids and activities — and time, to put it charitably, is tight.
Price is playing a significant role in the decision-making processes of the paycheck-to-paycheck consumer, said Carroll. That’s evident in the fact that paycheck-to-paycheck consumers are splurging more at quick-service restaurants (QSRs) than consumers who do not live paycheck to paycheck. And in terms of how they’re paying for it all, more consumers are using payment plans or racking up credit card debt to cover nonessential spending habits.
Carroll pointed out that credit card use among indulgent shoppers is 20% higher than those who do not engage in nonessential spending. The use of other payment products like buy now, pay later (BNPL) is 85% higher among splurgers than non-splurgers.
But if credit card debt is mounting, if nonessential spending is tipping consumers into paycheck-to-paycheck status, “they really need to take a pause and figure out how they can reassess” those transactions.
That reckoning will be especially important ahead of, and during, the holiday shopping season, which Carroll described as “one of the most financially stressful times of the year … as well as the most tempting. We all know gift-giving is a love language.”
But we may see a pullback this year, as financially stressed households are hit with sticker shock and are wary of damaging their financial standing. Carroll stressed that it’s a good strategy to take a moment to take stock of one’s financial position, and to take the path of “making different choices on that nonessential spend” and perhaps even save a bit by negotiating monthly bills where possible (such as car insurance).
Automating savings will also prove to be an optimal undertaking, she said, serving as a way to continually replenish some of the cash coffers at hand without having to take on more debt.
“You’re going to have to set a holiday budget — and stick to it — even though it is not always easy,” she told PYMNTS.
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