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Why People Live Paycheck to Paycheck

By: Brian Kim - September 13, 2007

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I read in a recent survey by Careerbuilder.com that 40% of Americans live paycheck to paycheck.

40%.

That’s almost one out of every two people. And that’s a pretty scary thought, considering the whole mortgage crisis going on in the U.S right now. Granted, each situation is different and there are probably perfectly valid reasons why some Americans have no choice but to live paycheck to paycheck (huge medical bills from a car accident, multiple dependents, outstanding family debt, etc.), but I’m pretty sure that comprises of only a small percentage of the 40% statistic in that survey.

This article is geared more toward those in the 40% who make enough money so they shouldn’t live paycheck to paycheck but still do.

So what’s going on? Why are people living paycheck to paycheck when the income they bring in seems to be more than enough?

The most obvious and easiest answer that comes to mind is that these people don’t make enough money.

They usually say if I made X amount of dollars more per month, I would be fine.

But that’s a dangerous belief to have – to think that more money is the answer.

Don’t get me wrong. Having more money can indeed help with your financial situation.

BUT, if you cannot properly manage and control the money you have now, what makes you think you will properly manage and control any additional amount of money you get in the future?

It won’t make any difference if you get more money because you will not properly manage and control that money either; the same thing will repeat itself over and over again.

What will most likely happen is that you’ll probably be at the very least, proportionally in the same situation in terms of your income to debt ratio as you were before.

For example, if your income was $40,000/year and your debt was $10,000, you had an income to debt ratio of 4:1. But let’s say you get a significant boost in income – say twice as much so you’re earning so now your income is $80,000 a year. Your debt will probably increase by the same proportion, in this case to $20,000, if not more.

And you know what? The debt will probably do just that. It will increase significantly.

It doesn’t seem like it will but it does in a lot of cases and it’s because people fall victim to Parkinson’s law.

Parkinson’s law: As your income rises, so do your expenses.

With your additional income, you feel like you have more buying power so you get a more expensive car, the monthly payments go up, insurance goes up, if you get in an accident with that car, repair costs go up, you eat out at more expensive restaurants, buy more expensive clothes, etc.

At the very least, the majority of people will be the same off proportionally speaking, but chances are that they will likely incur higher debt as they fall victim to Parkinson’s law.

Again, all this brings us to the first reason that most people live paycheck to paycheck.

People can’t properly manage and control the money they have now.

Ok then. What’s the answer to this? How can we properly manage and control the money we have now?

Here’s where we get a bunch of advice from personal finance experts.

Make a budget. Track your expenses. Save first, then pay your bills after instead of the other way around. Save your loose change and put it in a jar. Cash out a certain amount of money per month and only use that for food, going out, entertainment, etc.

That’s all great advice but we all know that even though people do these things - even though they make budgets, they track their expenses, they save first, they save all their loose change, etc., they still live paycheck to paycheck.

Again, remember, this article pertains to those who make enough so they shouldn’t live paycheck to paycheck but still do.

So what’s going on here?

To explain this dilemma, let’s take a look at how different times are today than they were before.

Advertising We’re being exposed to more advertising for products and services now more than ever before. We are literally soaked in it. TV, radio, Internet, billboards. It’s all around us. And advertisers have done a hell of job at convincing people that they need what they want.

If you think about it, we really don’t need much. It’s people’s wants that are taking a big chunk out of their paycheck as people have become a slave to their wants.

Job Security Job security is not as strong as it was before. Advancements in technology and outsourcing have replaced many jobs. People change jobs more frequently now but the problem is that when people get a job, they automatically chose to opt for a lifestyle that fits the income they get from that job, and more often than not, it’s a lifestyle that tends to exceed that income.

Then, with job security being so unstable, it’s not uncommon to see gaps of unemployment where no income is coming in for months at a time, but with this lifestyle made tailored to a certain amount of income, and no income coming in, people have to rely on loans and credit cards to maintain that lifestyle and keep afloat.

Then, if they do get back on their feet, they’re greeted with a pile of new debt that they incurred during their transition, so it becomes that much harder for them to get back on track because they have to dig themselves out of the financial hole that was recently made, contributing to the seemingly never ending paycheck to paycheck cycle.

Credit Cards Credit card offers bombard us in the mail every week teasing us with features such as 0% APR. Couple that with how instantaneous shopping can be thanks to the Internet and the instantaneous gratification mentality that seems to be prevalent nowadays and it proves to be a deadly combination.

Combine all these factors above with consumerism and materialism and you get the poster child for the person who makes enough so they shouldn’t live paycheck to paycheck, but still do:

The fake rich.

What most people don’t realize is that some people who look like they’re rich, not all, but some (and more than you think), are just faking it.

They live well beyond their means and rely on credit cards to buy the things they need to keep up the image they portray. Why? It’s probably because we live in a country where we are predominately conditioned to judge others by what they have, not by who they are.

Of course there are people out there who can afford all the nice things and I would say the old 80/20 rule comes into play. 80% can afford that lifestyle and 20% are just faking it.

It’s funny because the reverse is true too. The people you least suspect, who live very simply, who drive average cars, who aren’t very flashy are way more financially stable than those who are fake rich.

Again, not all people are like this, but more than you think. If you have a chance, pick up a copy of “The Millionaire Next Door” and you’ll see many examples of this in that book.

It reminds me of a verse I remember reading in Proverbs.

Proverbs 13:7 7 Some who are poor pretend to be rich; others who are rich pretend to be poor.

With regard to material possessions, what most people fail to realize is that even if you do buy the big mansion, the fancy cars and clothes, it will result in a temporary spike in pleasure. Over time, you’ll always fall back to the baseline of happiness you had before. You’ll always adapt to whatever environment you’re in after a period of time has passed, regardless of what it is.

The more people realize this, the more that they’ll begin to put material things in their proper perspective. Don’t get me wrong, there’s nothing wrong with living in a mansion, driving nice cars, wearing nice clothes. It’s just dangerous to think that should be the end game.

People who view that as the end game will climb to the top of the proverbial “materialism” mountain and realize that there’s not much on other side. And they’ll then proceed to look down the mountain and see other people struggling to get to the top and wonder why they even bother.

So for those who make enough money so they shouldn’t live paycheck to paycheck, but still do, more money is not the answer.

You have to properly manage and control the money you have now FIRST before that can help.

But let’s face it. The odds are stacked against most people nowadays. We live in times of:

Massive advertising. Loss of job security. Ease of shopping. Credit cards galore. Materialism and consumerism.

And we get people who are fake rich as a result because it’s really easy to pull it off with the availability of credit cards and it’s really easy to fall into the temptation of doing that when we live in a society where people are conditioned to judge others by what they have, not by who they are.

It’s really easy to point the fingers at all the reasons listed above, but the hardest thing to do is turn that finger around and point it at one's own self.

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4 Responses to “Why People Live Paycheck to Paycheck”

  1. Miss Cellania Says:

    Everyone I know who lives paycheck to paycheck does so for a reason you don’t mention.
    They earn minimum wage. They support a family. They try very hard to live within their
    means. More money would most definately mean more happiness for them, because of the
    stress relief alone. Studies back that up. Yes, there will always be people who spend
    more than they should, but you have to spend a little just to survive. For some, that’s
    all they have -a little.

  2. Brian Kim Says:

    Hi Miss Cellania,

    Thank you very much for your comments.

    I understand that there can be many reasons why people live paycheck to paycheck (such as the ones you’ve stated) so instead of covering all those reasons, I chose specifically to zero in on a certain niche within that population, namely those who do make more than enough so they don’t have to live paycheck to paycheck, but still do.

    “This article is geared more toward those in the 40% who make enough money so they shouldn’t live paycheck to paycheck but still do.”

    I specifically wrote the above sentence in the beginning of the article so that anything that was written after would only revolve around and apply to that certain population.

    I did not write the article with the population you described in your comments in mind. Had I done so, the article would’ve been different.

    You do bring up good points that make me want to write another article that addresses those issues.

    Thanks again for your comments.

  3. Peter Says:

    Benjamin Franklin said “The road to wealth lies in augmenting our means or diminishing our wants either will do, but the quickest way to wealth is to do both at the same time.”

    Problem is that people never decide to get wealthy… they never decide to either diminish the want or augment the means… they just settle for whatever happens and live life of “quiet desperation”.

  4. Nathaniel Says:

    Whoa, Peter, I love that Benjamin Franklin quote!

    Great article, Brian!

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