Dangers of Living Paycheck To Paycheck

By: Roshawn Watson

Is there not enough check at the end of your month? Apparently, you’re not alone.

Careerbuilder.com hired Harris Interactive to conduct an online survey amongst US workers 18 and older to determine our financial solvency. The results reveal a disturbing trend: 61 percent of workers reported that they usually live paycheck to paycheck just to make ends meet. This marks what appears to be a significant rise over last year’s 49% and 2007’s 43%. Notably, the trends held true for those with incomes higher than $100,000 as well. Thirty percent of workers with salaries of $100,000 or more report that they live paycheck to paycheck, up from 21% in 2008.

Savings and Investments Suffer Too
The effects of the recession can be felt in the households’ bottom lines, and many have resorted to dipping into savings as a means of coping with dwindling incomes, often precipitated by job losses and salary declines. Although the survey did not ask what percentage of respondents dipped into existing savings and investments, the survey did reveal that twenty one percent of workers say that they have reduced their 401 (k) investing or personal savings just to make it. Twenty three percent of respondents with salaries at least $100,000 annually also reported to have decreased 401 (k) contributions, which likely indicates that those with higher salaries (i.e. salary over $100K) were not financially insulated from the troubled economy or that they feared investing in such a volatile market. Additionally, many reported difficulty saving anything at all. Thirty-six percent of respondents said that they were not contributing to any retirement accounts at all, which is up from 31% in 2008. One-third (33%) of respondents don’t save anything from month to month, up from 25% in 2008. Thirty percent of respondents save between $51-$100 monthly while 16% save $50 or less monthly, meaning that nearly half of those who do manage to save are not putting away much.

Although the survey suggests going into savings and investments may be relatively common practice, it is typically ill-advisable. If this occurs habitually, one can end up with little to no money in the end.

Although the function of the emergency fund is to place a buffer between you and Murphy, it is not there to avoid dealing with financial problems. What’s quite unfortunate is that dipping into savings often masks a real financial problem thereby allowing one to stay in denial while his finances are depleted. For example, if you have a career crisis (i.e. underemployment), supplementing your income with savings may keep the woofs at bay temporarily, but you will still need to address your income problem. Otherwise, what are you going to do when the savings are gone. To be fair, when facing serious financial hardship tapping an emergency fund and even cashing in some liquid investments may be the only saving grace.

Another issue that the survey dealt with decreasing savings or investments. A general rule of thumb is to invest 15% of your gross income after becoming debt-free. Although such consistent investing, over the long-term, is one of the best ways to build wealth, there are definitely situations where you simply cannot continue at the same rate. Examples are if you have a job loss, a large emergency expense, or if you have a reasonable expectation of an emergency in the future (i.e. the birth of a child or job loss). One question that the survey doesn’t appear to address was what percentage of respondents actually decreased savings and investments due to actual financial hardship precipitated by the recession? With sensationalistic emphasis on negative economic news by the media, it is certainly likely that some decreased investments out of fear of losing money rather than out of necessity.

Although it is reasonable to be scared, the knee-jerk reaction to suspend (or
diminish) investments while the Dow is plummeting is the very reason why some
investors missed the whopping 45.7% upswing we have experienced since March.

In fact, in the third quarter alone, both the Dow and the S&P; 500 index returned 15 percent. It was the Dow’s best quarter in nearly 11 years. The point is if you must suspend investments or savings to prevent financial havoc, that’s fine, but to do so out primarily out of fear-based speculation can cause investors to end up on the losing side.

Overall, the survey results suggests that the majority (61%) of us are living on the edge financially. This supports previous data stating that most Americans are just one paycheck or two away from ruin. Interestingly, a sizable percentage of those with incomes of at least $100,000 annually were also in the same predicament. As expected, respondents tapped their savings and suspended investments to account for economic hardships. These results surely highlight the need for budgeting. Of course, that’s little comfort to those who are presently out of work or who make very little; however, for the rest of us, we must make sure that during times of plenty that we are acting responsibly with our money.