If your checking account is typically empty by payday, does that mean you’re living paycheck to paycheck?
After all, “paycheck to paycheck” means different things to different people.
Nearly half of Americans believe they live paycheck to paycheck, according to a recent report from the Bank of America Research Institute.
But when the think tank applied the strict definition of “paycheck to paycheck” to real-world bank accounts, researchers found that it’s the households that are actually making ends meet from one payday to the next. They found that only about a quarter of
What does “paycheck to paycheck” actually mean?
Strictly speaking, living paycheck to paycheck means spending almost all of your income on necessities like rent, childcare, and food.
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But for the average consumer, living paycheck to paycheck may mean having an empty checking account by the time your next paycheck arrives.
“The common sense definition is that by the end of the month, you’ve spent all your paycheck and you have nothing left,” said David Tinsley, senior economist at Bank of America Research Institute.
The good news, experts say, is that many Americans who live paycheck to paycheck are doing reasonably well despite appearances.
“Sometimes you feel like you’re doing something wrong because you don’t have that much time left until your paycheck,” said Elizabeth Ayoola, a personal finance expert at NerdWallet. “But your net worth is not.”
In a recent NerdWallet survey, 57% of Americans said they live paycheck to paycheck.
But is it really so? Among the survey’s paycheck-to-paycheck respondents, 31% said they regularly contribute to a savings account. More than one-fifth said they had an emergency savings account.
It’s important to note that neither NerdWallet nor Bank of America define what it means to live paycheck to paycheck in their surveys.
For professionals, living paycheck to paycheck generally means necessities swallow up income. If you’re actively saving for retirement or spending lavishly on gym memberships and housekeepers, by definition you’re not living paycheck to paycheck.
But clearly, many Americans use a different definition.
Living paycheck to paycheck isn’t necessarily a bad thing.
For millions of consumers, living paycheck to paycheck means most of their paycheck is gone when their next paycheck drops, financial experts say. And that’s not necessarily a bad thing.
“If you’re tapping into those savings, you’ve got an emergency fund, and your debt isn’t spiraling out of control, you’re probably doing pretty well, even if you’re living paycheck to paycheck. ” said Mr. Ayola, who is in charge of finance. NerdWallet experts.
NerdWallet found that for many consumers, the feeling of receiving paycheck after paycheck doesn’t mean they don’t have money. It’s just that the budget is tight.
For example, let’s say you manage to live on a 50-30-20 budget by allocating 50% of your income to needs, 30% to wants, and 20% to savings.
“Pay yourself first” and save 20% the day you receive your paycheck. During your pay period, you spend the remaining 80% on your own needs and wants. The balance in your checking account gradually decreases towards zero. However, your savings account will remain intact.
“The budget is 100 percent spent, so it looks like there’s nothing left,” said Melissa Cox, a certified financial planner in Dallas.
But, according to Cox, “As long as you’re saving money, you’re not living paycheck to paycheck. Some people don’t like having money in a checking account.”
Many of us live paycheck to paycheck
No matter how you define “paycheck to paycheck,” many of us seem to live that way.
The Bank of America survey found that the percentage of consumers who say they live paycheck to paycheck has gradually increased, from about 35% in early 2022 to 47% in the third quarter of 2024.
“I think it’s primarily an inflation issue,” Tinsley said. Consumer prices rose rapidly in 2022, and rose further in 2023 and 2024.
When Bank of America researchers looked at the exact definitions of subsistence pay and salary, they found similar trends.
In 2024, nearly 30% of households will spend more than 90% of their income on essentials, a higher percentage than in 2019.
More than a quarter of households spent at least 95% of their income on essentials. That number is also rising.
Even wealthy Americans feel financially limited.
Researchers were surprised to learn that it’s not just low-income Americans who live from paycheck to paycheck.
The think tank found that one in five households earning more than $150,000 a year met the strict definition of a living wage.
Tinsley said one possible reason is that high-income households are more likely to own expensive homes with high mortgage payments.
For those who feel like they’re living paycheck to paycheck, USA TODAY has compiled the following expert tips on how to measure your financial health.
Are your debts under control?
If you have unsecured debt, such as a credit card balance, that you can’t reduce with your monthly payments, it could be a sign that your finances are tight.
“When you talk to customers, it’s clear whether they have a lot of debt,” Cox said. “Those are the types of people that I would say are literally living paycheck to paycheck because they don’t have enough money.”
Are you saving money every month?
Experts say regular contributions to a retirement account are a good sign that you’re not really living paycheck to paycheck.
Another indicator of financial stability is maintaining an emergency savings account. Ideally, an account with enough funds to cover three to six months of expenses.
“Not only does this give you peace of mind, but it also makes you less dependent on your next paycheck,” says Ashley Foulkes, a certified financial planner in Birmingham, Alabama.
The key is to keep replenishing that account when you need to withdraw from it.
Read more: Many shoppers are heading into Black Friday with debt from last year’s holiday season
Are you spending money on things you don’t need?
NerdWallet’s research shows that many consumers who say they live paycheck to paycheck also spend on entertainment and luxuries such as subscription services, gym memberships, salon treatments, and house cleaning. I found out.
Experts say many of these people aren’t technically living paycheck to paycheck. They could stop paying for luxuries and have more money in the bank on their next payday.
