Nearly a Quarter of Americans Spend More Than They Earn: Why It’s Trending Across Demographics
In May, the Federal Reserve released its Economic Well-Being of U.S. Households in 2022 report — and the results painted a worrisome picture.
The study revealed a sharp decline in self-reported financial well-being, which reached its lowest point since 2016. The share of people who spent less than their income could support fell from the year before and the percentage who reported higher credit card debt rose. Fewer people feel that their retirement savings are on track and the percentage of adults who think they’re worse off financially than the year prior rose to its highest level since 2014 — and the financial stress played out across all demographics.
One figure stood out more than all the rest, though. Nearly one in four Americans reported spending more than they earned, which is the polar opposite of good financial health. The trend was born from a perfect storm of economic challenges — rising prices, stagnant wages, a down market and overreliance on credit.
Necessity, Not by Choice, Led People To Spend More
One of the study’s bright spots was that one in three people said their family’s income increased over the previous year — but a much larger 40% said their spending increased, too. The natural assumption might be that people bought more things because their higher earnings could support increased spending, but lifestyle creep isn’t what appears to be driving this dynamic.
“In current times, most people spend more than they earn not because their lives became more extravagant, but because the prices of basic goods have increased substantially over the past few months,” said Raymond Quisumbing, MBA, a registered financial planner with BizReport. “While income may have stayed the same, expenses have steadily gone up.”
While some said that both their income and spending increased, 23% reported that their spending rose but their take-home pay did not.
The State of Household Expenses Explains the Rise in Spending
About 82% of the study’s respondents were confident that they could pay their bills in the month that the Fed conducted the study. That’s a drop of 4% over the year before — close to one in five Americans are no longer able to cover their most basic household expenses.
“There are plenty of people in situations where even if they’re being very responsible and pinching every penny they can, they still come up short because they simply don’t make enough money to cover even basic living expenses,” said Paw Vej, chief operating officer of Financer.com, a financial platform with a presence in 26 markets. “Couple that with rising prices of essential goods and services, and you have thousands of people reporting financial struggles.”
Consumers Took a Hit From Every Angle
The price of food and fuel rose sharply in 2022, as did water, gas and other utilities — but the pain didn’t stop there.
“In addition, the U.S. Bureau of Labor Statistics has highlighted the outpacing of housing and medical care prices in relation to overall inflation, making it increasingly difficult for individuals to manage their expenses within their income limits,” said Vej.
The spike in housing costs was hardest on renters. The report showed that 64% of renters reported paying over the prior 12 months, including 30% who reported steep increases to their rents. Conversely, 22% of homeowners said their mortgage payments rose, with just 7% saying they rose significantly.
When Prices Rise but Income Doesn’t, Credit Cards Fill the Gap
The most common bill people did not expect to pay in full was their credit cards, which 9% of adults didn’t plan to pay off during the month of the study. Also, the percentage of people with the cash to cover a $400 emergency fell from 68% in 2021 to 63% last year. Among those with no emergency savings, plastic was the most common strategy for dealing with unexpected expenses.
“With the high rate of inflation and stagnant incomes, Americans have unfortunately become reliant on their credit cards, with around 46% of Americans with credit cards now carrying credit card debt month after month,” said MaxCash co-founder and CEO Fred Winchar, who has 40 years of experience in the financial services and management industry. “Credit cards provide a means to afford these products.”
Before You Panic, Consider the Post-Pandemic Context
The Fed conducted the study in 2022, which might make the results appear more dire than they might have if not for the extraordinary circumstances of 2021.
The report stated, “Pullbacks in spending in the early part of the pandemic, coupled with fiscal support that many families received in 2020 and 2021, may have given some households more margin in their budgets over this period.”
Since the study compares its findings to those of the year before — when households tightened their budgets and were flush with stimulus cash — the results might be unfairly skewed toward doom and gloom — but even so, the worst might still be to come.
Expect Things To Get Worse Before They Get Better
Despite the context of 2021, the report undoubtedly chronicles widespread suffering — and eventually, it will affect businesses and increase the likelihood of a recession.
“In the coming three to six months, I foresee a situation where numerous companies will begin to feel the strain of economic pressures,” said Baruch Silvermann, CEO of The Smart Investor. “Consequently, they will be compelled to lay off employees in sectors that haven’t done so already, and even those that have will likely make further cuts. As the unemployment rate rises, this will hit the American consumer, who will have to make substantial cutbacks, reduce their spending, and make necessary adjustments to cope with the new financial situation.”
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