Survey results released this week revealed that 36% of Americans who earn $250,000 or more a year – identified as the top 5% of earners by the U.S.
Census Bureau – live paycheck to paycheck.
Why are the country’s highest paid still spending their paychecks before they can cash their next one? Credit use, rising household expenses and student loan debt may play a part in their financial habits.
PYMNTS.com and LendingClub Corp. conducted the survey of 4,048 U.S. consumers from April 6 to April 13. Overall, 61% of consumers throughout all income brackets said they live paycheck to paycheck, making it the most common financial style in the U.S. In a survey conducted last April, just 52% of people said they lived paycheck to paycheck.
“This increase means approximately three in five U.S. consumers devote nearly all their salaries to expenses with little to nothing left over at the end of the month,” said PYMNTS.
Apart from the 36% of top earners who live paycheck to paycheck, the survey found that 26% of those who earn $200,000 to $250,000 live paycheck to paycheck, as well as 31% of people earning $150,000 to $200,000 and 36% of people earning $100,000 to $150,000. Even so, only 10% to 12% of people in these high-income brackets said they had trouble paying their bills.
According to the Education Data Initiative research organization, people in these income brackets fall into the category of Americans making more than $74,000 annually who hold 60% of total public student loan debt. Those who make $106,827 to $373,894 owe an average of $45,965
Monthly payments for those with 45,000 student loan range from $477 to $4,040, depending on the APR and the length of the loan, said WalletHub. Typically, loans last 10 years and have an APR between 5% and 14%. For a person with a 10-year loan at 5%, the monthly payment would be $477.
As of February, the average monthly expenses for American households was $5,111, according to a Consumer Expenditure Survey from the U.S.
Bureau of Labor Statistics cited by the Motley Fool.
While more than a third of the PYMNTS survey respondents who make $250,000 are part of the paycheck to paycheck group, PYMNTS explained that they “handle their financial lifestyles in interesting ways,” and are associated with more credit card use.
Along with more intense use of credit and financial products, high earners also tend to have higher credit scores – calculations of financial risk. According to the U.S. government, credit scores can be calculated based on payment history, outstanding balances, length of credit history, applications for new credit accounts and types of credit accounts.
In addition to helping consumers get loans, strong credit scores can make it easier to rent an apartment, lower your insurance rate, impress employers, get a cell phone without a deposit and get utility services, according to credit card company Capital One.
Those who earn more than $250,000 are “40% more likely to use financial products than consumers in the lowest bracket, and as many as 63% of them have an above-average credit score exceeding 750 points,” said PYMNTS.
Also, 22% of people in this bracket have three or more credit cards.
“Credit products are a cash flow management tool for paycheck-to-paycheck consumers, especially those in higher income brackets,” PYMNTS explained. Other financial products high income consumers use are personal loans, and many have recently made payments at an above-average rate of 14%.
According to the Federal Reserve Bank of New York, there was a “solid increase” in household debt in the first quarter of this year of $266 billion for a total of $15.84 trillion. Credit card balances were $71 billion higher than the first quarter of last year.
Bloomberg reported this week that housing expenses that soak up a considerable amount of earnings for most Americans, “skyrocketed” since the start of the COVID-19 pandemic in March 2020. From April of last year to this April, inflation caused the Consumer Price Index to shoot up by 8.3% before seasonal adjustment.
“To finance their lifestyles, higher-income households are more likely to put expenses on credit cards – but also more likely to be able to pay off their balance in full,” said Bloomberg, and U.S. consumer borrowing “soared” in March.
However, order to combat inflation, the Federal Reserve Bank is expected to raise interest rates. This could make credit card payments steeper.
“Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark,” said CNBC last month. “As the federal funds rate rises, the prime rate does, as well, and credit card rates follow suit. Cardholders see the impact within a billing cycle or two.”
While high-income and low-income earners are living paycheck to paycheck in the U.S., a Federal Reserve Bank study released this month found that 78% of adults in the country said they were doing okay or living comfortably financially as of last year, a record high since 2013. This might be attributed to government support offered during the pandemic, such as Child Tax Credits.
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