Today’s Labor Department report showed higher payroll numbers, which followed a report earlier this week from the Bureau of Economic Analysis that revealed consistent month-to-month gains in personal expenditures.
All indicators of a strong economy, right?
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Well, personal finance consultants and analysts assert that while the numbers look good, many consumers are strapped for cash and continue to live from one paycheck to another. They’re caught in a cycle of living beyond their needs — and for a variety of reasons.
Lauren Anastasio, a certified financial planner at SoFi, a personal finance company, told WWD that a “strong economy does not always equate to a strong personal financial position.”
According to the government data, payrolls increased by 164,000 in July, which was just below what economists expected — but still robust. Wages during the month showed a 3.2 percent year-over-year gain. The BEA data showed personal outlays gaining a whopping $44.2 billion during July.
And even as personal income and wages have shown gains, U.S. consumers are using credit cards to fund many of these purchases. According to a report from ValuePenguin.com and The Lending Tree, “the current outstanding revolving debt in the United States is $1.031 billion.” And it’s a debt load that continues to grow at a faster pace than consumers can keep up with — especially if they’re spending on goods and services that are not essential, experts said.
With debt, there are two tiers of credit, and each is growing at different rates. “The majority of these debts originate from depository institutions (e.g. banks) — $823.7 billion is owed due to credit extended by these companies,” authors of the report noted. “The remainder of the credit debt owed to finance companies and credit unions — $57.1 billion and $53.3 billion, respectively.”
Researchers at the firm said average credit card debt is closely tied to total “outstanding revolving debt.” And that over time “the two have risen together, exhibiting strong correlation. Over the last decade, average credit card debt has grown at a faster pace — rising by 52 percent since the year 2000. In that time, outstanding revolving credit has grown with exactly half that rate — increasing 26 percent.”
Which means consumers are using credit cards at a faster pace than the lenders who are originating the credit. So, what is behind the behavior driving consumers to spend more, and use credit to make purchases? The answer is complicated and is partly due to the strong economy itself.
“While it’s true that consumers may feel confident in the consistency of their paycheck and the stability of their job, this alone will not keep someone from living a paycheck-to-paycheck lifestyle,” Anastasio explained. “When the economy is strong, consumers tend to spend more and save less than during a weak economy with more uncertainty. Failure to save an emergency fund, cash tucked away in a savings account for a rainy day, is what causes consumers to be unable to manage an emergency, not insufficient income.”
Meanwhile, social media pressures consumers to spend when they shouldn’t. “There’s no incentive for people to save when we constantly see everyone ‘living their best life’ on social media,” Ande Frazier, chief executive officer of MyWorth, told WWD. “Social media has perpetuated an environment of having to ‘live your best life’ at all costs, creating an unattainable standard for most to achieve. There’s become an increase in the number of things ‘we need’ that allows us to have short-term gratification at a long-term cost.”
And higher costs of housing, transportation and health care, as well as student debt, added financial pressure to households. “It’s also a challenge for consumers to meet financial needs because many people don’t have money to save with substantial college loans that take years to pay off and growing credit card debt,” Frazier said. “And in cases of an emergency when money is absolutely critical, they have to go into even more debt. People fall into a vicious cycle that seems impossible to get out off, so they just give up and keep spiraling into debt.”
Chris Smith, founder of I Am Net Worthy, a personal finance site for Millennials, told WWD that consumers find it “challenging to meet financial needs since most living costs have risen. Many find themselves with other additional expenses, making it harder for them to achieve financial stability whereas others struggle because they simply have bad spending habits. Living paycheck to paycheck is not the ideal financial plan.”
Smith said living paycheck to paycheck “means you can’t count on having an emergency since you don’t necessarily have the money to have one. Individuals with this spending trend usually happen to be in jobs where they don’t make enough money for their expenses, are comfortable with the life they are living otherwise they would try to make a change, any change to improve their life. It is extremely common to have that buy now, pay later mentality.”
The result is a growing debt load, Smith said, which “creates more poor decisions, and opens a door to impulsive buying.”
“Unfortunately, too many people focus on materialistic things and go out of their way to get those things just to feel a sense of belonging or status representation not even knowing if they can even afford it in the first place,” Smith said. “Truth is, everyone makes poor financial decisions at some point but it’s how you make sure they don’t happen again by developing a better spending behavior. Having an ideal financial plan can keep you on track to reach the financial stability that you would like and keep your priorities straight. If you want to live a better life, you will need to learn to make better decisions.”
Coupled with poor decision-making is a business and jobs landscape that is evolving. There are more “contract workers.” According to data from NPR and Marist, 20 percent of U.S. workers “are contract workers hired to work on a specific project or for a fixed period of time.” And just over half of them “don’t receive benefits from their jobs,” while 49 percent of contract employees have income “that varies from month to month or seasonally.”
Frazier said many people are also living paycheck to paycheck “because the job market is changing with an increase in technology, automation and part-time work, eliminating many of the opportunities for security in the workplace.”
Fast fashion and disposable products as well as “planned obsolescence” of many products also play a role. Frazier noted that 40 percent of consumers “can’t afford a $400 emergency expense, it’s clear that many are living beyond their means. This is due to increased marketing to women, along with a decrease in the quality of goods. There is a constant need to replace them or buy more.”
“The ease of purchasing has also contributed to overspending or spontaneous spending,” Frazier explained. “These days your credit card populates for you; products ‘you may be interested in’ are suggested to you at every touchpoint; deals are temporary (or so it seems) and need to be acted on quickly, and everything is delivered right to your front steps. It is so easy and convenient to spend without understanding its impact on your long-term financial goals. There is no ‘financial pause’ where you can take account of your values and goals and how this particular purchase aligns.”
Anastasio said consumers need to adjust to the realities of today’s economy. Anastasio said a certain income level “cannot buy the same lifestyle that it could have a decade ago, and consumers need to adjust their expectations about what they can afford. Someone making $100,000 today cannot afford to live the same lifestyle that a similar salary could have supported a few years ago.”
Today’s consumer is overwhelmed by lifestyle inflation, or what Anastasio describes as “lifestyle creep.”
“Lifestyle inflation is a phenomenon that takes place when someone experiences an increase in income, like from a job change or promotion, and find that their fixed expenses like rent and transportation tend to increase with that income because they are pursuing a lifestyle associated with higher income instead of allocating the extra money toward saving,” Anastasio said.
By way of example, Anastasio said to imagine a 22-year-old making $45,000 out of college. They likely have a roommate and use public transportation, “and need to keep dining out and discretionary spending at a minimum to pay their bills.”
“This same person by age 28 may have changed jobs a few times or experienced a couple of pay bumps along the way and could be earning $75,000 a year,” Anastasio said. “More often than not, they have moved into a more expensive apartment, opt for Uber or Lyft more frequently than the subway or bus, and they likely go out to eat or drink more often, too. By allowing your lifestyle to inflate, you will forever feel like you’re forced to live paycheck to paycheck.”
Jerry Brown, owner of Peerless Money Mentor, told WWD these behavior trends can be “reversed by teaching people how to become conscious consumers. Just like there are disclaimers during gambling commercials, there should be some kind of disclaimer at the end of every commercial saying, ‘Overspending is bad for your health.'”
But, Brown said this would be unlikely. “A more realistic idea would be to make financial literacy classes mandatory in grade school that not only teaches the technical aspects of money, but the emotional component of it as well,” Brown said.