The Dangers of Living Paycheck to Paycheck, According to Experts
In modern America, even the rich are having a hard time getting by.
According to a study from Lending Club and PYMNTS, about 61% of the country — 157 million people — now lives paycheck to paycheck. Among them are about 36% of the high-income earners who make more than $250,000 a year.
Whether you spend too much, earn too little or some combination of both, spending your life one pay period away from financial disaster is as dangerous as it is stressful.
It’s Easy To Fall Into the Cycle of Debt — Getting Out Can Be Impossible
Emergencies happen whether you have an emergency fund or not, and when you’re living paycheck to paycheck, borrowing money to meet unexpected expenses is often the only option. But desperation borrowing adds more pressure to an already precarious situation, which often necessitates even more borrowing to keep yesterday’s lenders at bay.
The end result is an endless cycle of toxic debt.
“In my twenties, I lived paycheck to paycheck while working as a cook,” said LGBTQ+ travel writer Lindsey Danis of Queer Adventurers.com. “I never had money left at the end of the month, so every emergency like a car repair or vet bill went on my credit card. A series of disastrous events nearly maxed out my credit cards and was the wake-up call I needed to quit cooking as a career and take charge of my earnings through self-employment.”
Just as the cycle of debt is self-perpetuating when you live paycheck to paycheck, so, too, is the debilitated credit that the cycle creates. The more overextended your finances become, the lower your credit score sinks and the harder it becomes to get ahead by getting a new job or starting your own business.
“When I started my own business, I did not have a good credit history,” said Jessica Chase, loan and finance expert at Premier Title Loans. “I would delay my student loan payments and sometimes even duck my credit card payments. This had an immense impact on my credit history, which led to decreasing my credit score to below 670.”
As a college student, she didn’t fully understand the ramifications until she tried to launch her own business after graduation.
“I went over to some banks, and guess what, all of them rejected my application to acquire a loan,” Chase said. “The only reason was my bad credit score.”
For those struggling to get by, the impact can be much more immediate than the dashing of entrepreneurial dreams.
A battered credit score — so common among those who live paycheck to paycheck — can make it hard to borrow money, disqualify you from all but the worst rates and increase the likelihood of default and, in the worst cases, catastrophes like bankruptcy, foreclosure, eviction and homelessness.
So, if you’re living without any financial cushion, where should you begin? The experts who spoke with GOBankingRates echoed the advice of Charles Schwab and Forbes. First, create a budget and spending plan to pinpoint trouble spots, eliminate waste and increase savings.
“Take a look at your fixed expenses and see where you can make cuts,” said Simon Courtney, editor of Healthcare Business Tech. “For example, you might be able to save money on your cable bill or by getting a more affordable car insurance policy. You can also try to save money on your groceries by cooking at home more often and by buying generics instead of brand-name items.”
Those small adjustments can quickly add up to a cushion of a few hundred bucks. That’s just the kind of breathing room that people living paycheck to paycheck need so that every blown alternator or child in need of braces doesn’t result in a credit card swipe or, even worse, a payday loan.
Arvie Narido, writer and gift researcher for Gift Rabbit, is living proof of what’s to be gained by breaking the chains of paycheck-to-paycheck living. For Narido, liberation came in the form of a side gig — and she can rattle off a half-dozen ways that a financial cushion changed her life.
“From a one-income household, my family became a two-income household because of my side hustle, and we reaped great benefits from it,” Narido said. “I became financially independent from my husband. Before, we were solely dependent on his income, and we were living paycheck to paycheck. We built a good emergency fund for at least six months worth of our living expenses. We were able to allot some ‘fun money,’ where we could buy ourselves non-essential things or dine out more at our favorite restaurants, which we barely enjoyed when we were only a one-income household.”
It’s important to indulge in some wants periodically, but plenty of other things are far more consequential.
“I was able to financially support my sick mom, who is recovering from cancer,” Narido said. “I was able to help her pay some hospital expenses and medications without compromising our family budget. My child and I were able to get our own life and health insurance, which I lost since I quit my job and became a full-time mom.”
Living paycheck to paycheck also robs you of the ability to be generous to the people and causes you care about.
“Lastly, this might sound cheesy,” Narido said, “but because of my side hustle, I was also able to give back to my community by donating a cut of my income to a few local non-government organizations helping homeless people and children.”
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