The paycheck-to-paycheck economy reaches far and wide, as a growing number of individuals and families across the U.S. struggle mightily to make ends meet.
Simply put, there’s little to no money left over to save after the monthly bills are paid, eliminating the ability to build a sense of financial wellness or to deal with unexpected events.
Income, it seems, offered no real cushion, since four in 10 people with annual earnings of about $100,000 still live paycheck to paycheck, alongside the 54% of U.S. households dealing with the same fate.
As Scott Sanborn, CEO of LendingClub, told Karen Webster, “the data should be a wake-up call – not only for all of us in the industry, but also for the policy-makers in Washington and for the regulators.”
PYMNTS data shows that as of July, 50% of consumers would be able to pay an unexpected expense of $400 directly with funds from their checking/savings account or in cash. That’s a marked improvement from earlier in the spring, when the tally was 45%. The share of consumers who cannot handle that $400 shock has declined from 11% earlier in the year to a recent 4%.
Things have improved at least a bit, depending on where you look – though for some of us, the journey toward true financial wellness remains a long one.
That’s in part because the amount of savings that are in place are critical, to buffer individuals or families against those financial shocks. PYMNTS’ paycheck-to-paycheck reports have shown that 33% of consumers have less than $1,000 in savings. Drill down a bit, about 10% of Boomers live paycheck to paycheck and struggle to pay the bills; 33% of bridge millennials report the same.
Learn more: Reality Check: The Paycheck-to-Paycheck Report
Technology can make the move toward meeting financial obligations just a bit easier. PYMNTS data found that consumers gleaning access to a range of information through multiple connected endpoints don’t have as much of a struggle.
The Big Picture
On the surface, the consumer is healthier – if you look at the aggregate. Credit card balances went down through the pandemic, and stimulus payments came in waves.
With all that pent-up credit demand waiting in the wings, said Sanborn, “you really do need to be thoughtful about managing your obligations and deciding when to use credit versus saving up to make a purchase. That’s kind of ‘motherhood and apple pie,’ and everyone wants to do that – but the information is fragmented.”
And with that fragmented information, he said, it’s all too easy to lose track of things until the month-end statements come in. It’s the paycheck-to-paycheck consumers who are most at risk and struggle mightily with expenses, even if the aggregate data as mentioned above look good.
It’s no longer the case that the people who get into credit card debt or have financial struggles are those who earn low wages or make imprudent financial decisions, noted Sanborn. Now, it’s pretty much everyone who struggles with the vagaries of rising expenses and volatile incomes. The mismatch is such that events like an accident, a high deductible on a surgery or a life change such as a divorce can take their toll.
Not surprisingly, as Sanborn noted, savings are key to being able to withstand unexpected expenses. Roughly 70% of those who say they struggle to pay bills have less than $1,000 in savings – and still, 10% of those who have more than $15,000 in savings say they still struggle to pay bills.
Not having the cash cushion in place to absorb shocks has a negative ripple effect by keeping people from being able to access credit, or to access it at a fair rate, said Sanborn.
Against that backdrop, he noted, innovation within the financial services sector can help people make smarter financial decisions and build up their reserves. He pointed to offerings wherein individuals can move their credit card debt to personal loans, while simultaneously accumulating savings with the company as a way to improve FICO scores and financial resiliency.
“Lenders are performing better than they were pre-pandemic, which is good for them as well as for consumers,” Sanborn said.
But looking ahead, those same lenders will have to align their products to be more focused on positive outcomes for the consumer – not simply making it easier to spend money.
That requires a bit of education, he said – and those same firms will have to determine and relay to the consumer whether they have the savings they need to handle income interruptions or enough insurance on hand to handle emergencies. There’s more that everyone should be doing – and could be doing – to help aggregate this information and make it clear to consumers what’s happening.
“That’s our goal,” Sanborn said of LendingClub. Its acquisition of Radius Bank, adding to its existing services and products to include credit and savings, can help the firm develop a holistic view of the consumer, predicting when there may be a need for savings “buffers,” when payment dates need to be changed, when spending should be reined in, and so on.
“There are lots of firms going after pieces of [those insights], but I think where this is headed – and certainly where we’re headed – is aggregating that information to provide the ability to see it all in one place,” Sanborn explained.
As he told Webster of the journey to financial wellness – and out of the paycheck-to-paycheck cycle – “little things can make a big difference.”