The FWD #214 • 923 Words
Let’s unpack those clickbait statistics about household budgets.
Over the past few years it’s been easy to find news headlines painting a bleak picture of Americans’ financial health. Disappearing COVID assistance, significant inflation, and a brutal housing market all make a strong case for why consumer confidence hit rock bottom in 2022.
One of the most ubiquitous assertions across these headlines is that an exceptional share of Americans today live paycheck-to-paycheck. Here’s a just small sample of recent claims that all generated stories on CNBC, Forbes, and other mainstream media sources.
- 61% according to PYMNTS and LendingClub (June 2023)
- 78% according to PayrollOrg (September 2023)
- 65% according to CNBC and SurveyMonkey (April 2024)
- 34% according to Bankrate (August 2024)
That’s quite the spread. Such wildly different estimates—all of which purportedly describe the same financial struggle—highlight the need for a closer look at how and why these numbers find so much traction.
Methods and motives
While these surveys generate plenty of clicks, they often come with significant limitations that should lead us to treat them with more caution.
Lack of consistency: Each is conducted by a different company with their own questions and sampling methods. Apples-to-apples comparisons of results are a challenge.
Online polling: Nearly all use online surveys to collect responses. PayrollOrg’s survey, with over 39,200 respondents, was an opt-in internet poll—the same method that leads to 1 in 10 young adults claiming they’re qualified to operate an Ohio-class nuclear guided missile submarine.
Proprietary methods: Some surveys do share limited aspects of their sampling and weighting methods, but many are loath to provide any details at all. When asked for the specific wording of the paycheck-to-paycheck question in their survey, a PYMNTS representative declined: “[The] instruments we use are proprietary to our organization.”
Hidden intentions: The companies sponsoring these surveys aren’t consumer research firms. They all offer financial products and services, and use the findings to generate earned media that promotes their products. For example, as an online personal loan provider, LendingClub stands to benefit from increased anxiety over household budgets. (They also happen to be fond of deceptive fees, which led to an $18 million settlement in 2021.)
These factors underscore why we should approach such surveys with skepticism, and seek out more reliable sources.
Defining “paycheck-to-paycheck”
At the heart of this issue is what exactly paycheck-to-paycheck means. Unfortunately, there’s no commonly accepted definition, so it’s very much open to individual interpretation. Here are three possible ways to think about it.
1. Scraping by: Less than a few weeks of savings to cover necessary expenses. No potential for discretionary spending or saving. One unexpected expense leads to immediate financial jeopardy.
2. Treading water: Less than a few months of savings. Some discretionary spending and limited saving. One unexpected expense only causes major stress, but several in a row risks serious instability.
3. Lifestyle locked: At least a few months of savings. Nearly all income goes to necessary expenses, savings (including retirement), and regular discretionary purchases. Lifestyle is closely tied to income level. Long-term financial goals might be underfunded, but most unexpected expenses are manageable.
It isn’t difficult to imagine a household in each of these categories responding yes when asked whether they live paycheck to paycheck. But there’s a major difference whether a big car repair bill leads to a week not eating out—or an eviction notice.
What better data tells us
Luckily, we have more reliable ways to measure the financial well-being of American families. Let’s start with the Survey of Consumer Finances (SCF) conducted by the Federal Reserve every three years. The latest data from 2022 tells us that the median American family has about $8,000 in cash sitting in their checking and savings accounts—up from $6,140 in 2019, adjusted for inflation.
Next, we can use the BLS Consumer Expenditure Survey to find out how much Americans spend on their necessary expenses. Adding up the average amount spent on food, housing, transportation, and healthcare we get $4,576 of necessary monthly expenses.
Dividing available cash reserves by expenses shows us that the average American family has, in theory, almost two months of liquid savings to cover necessary costs. Is that paycheck-to-paycheck? Depends on who you ask.
An analysis of anonymized banking data of more than 5 million accounts found that 92% could weather an unexpected $400 expense by paying cash or credit card (and paid off within three months).
Some important context
While that back-of-the-napkin math suggests most Americans aren’t “scraping by” as other surveys might claim, we can build a better perspective with a few more important data points from reliable sources.
The good news: We seem to be moving in the right direction. According to the Federal Reserve’s Survey of Household Economics and Decisionmaking (SHED), the share of adults who feel they’re worse off financially than 12 months ago dropped to 31% in 2023. Consumers spent more than expected in July, staving off recession fears for now. Lower grocery prices don’t hurt, either. Relative to wages, they’re now back down to pre-pandemic levels.
The not-so-good news: We’re not all starting from the same place. Breaking down the SCF data tells us that renters have just a fraction of the cash on hand as homeowners. Similar gaps exist between Black and Hispanic households when compared to whites. Unfortunately, we know this story all too well.
In the end, financial health isn’t just about numbers—it’s about perspective. Perhaps the real paradox is that while many Americans feel financially stressed, they might be more resilient than they realize.