Just heard a statistic that 70% of America is living Paycheck to Paycheck....

[FlowGirl]

I have a friend that is a Finance Manager for a car dealership, in his estimation 90% of the people he finances are "buying a car payment". They go with the terms that get the monthly payment as low as possible. He has a tricky job getting most customers financed because most of them are whay over extended, but they have to have that brand new car.

The first car that we bought after getting married we handed the dealer half the amount in the form of a personal check and  half in the form of a check from our credit union (financed at favorable CU rates for only 2 years).  The dealer was stunned!  Said he rarely saw anyone come in that organized or with money in hand.  I didn't think we were all that abnormal, but I guess most people do really just look for a "payment they can afford."

BTW,  We drove the car for 7 years and gave it to my dad when we moved to Japan.  He says it still runs great.  Paid cash for our cars over here and will have the cash to buy two good cars when we return to CONUS so no more car payments for us.  For some reason car debt bug me more than any other kind of debt - I hear they're up to 72 month loans now. Ugh!

 

[Andre1969]

Re: Just heard a statistic that 70% of America is living Paycheck to Paycheck...

I guess one reason car debt can be so scary is because cars depreciate, often faster than you pay them down. Also, the payment timeline often outlasts the warranty on the car, so you run the risk of making a car payment AND having repair bills at the same time!

That happened to a buddy of mine, who had a 1998 Tracker. He got suckered into some "Smartbuy" program where you made 47 regular payments and then a 48th balloon payment. It was also kind of like a lease, where if you wanted, you could turn it in before the 48th payment, and pay a mileage penalty if you were over. I think it was 10 cents per mile, and the limit was 15K per year.

Well, as of the 48th payment, he was at around 90,000 miles. He could either turn it in, pay $3000, and have NOTHING. Or pay $5600 and at least have something to drive. He paid it off, and almost immediately the transmission went out on him. That was another $1100. Would've been more, but I shopped around for him and found a used one for under $700 and a place to put it in for ~$400. Funny thing too, but that thing ate trannies every ~20,000 miles, but its warranty was good for 60,000 miles. The third "meal" was right around then. The next rebuild started to go around 86,000, but for about $60, a local transmission shop futzed around with it, got it running again, and said he might get a few more miles out of it. Then at 92,000 we had the used tranny, with 55,000 miles on it, put in. And that tranny never gave a bit of trouble right up until the end, when he traded it with 135,000 miles on it (or about 100,000 miles total on that particular transmission)

He has a 2006 Nissan Xterra now. The payment is high, about $478 per month (partly because he let them talk him into an expensive extended warranty and security package), but he also put $4000 down, is rounding the monthly checks off to $500, and I think he got it for a bit under invoice. I think they hold their value pretty well, so if nothing else he should never be TOO upside-down on it.

 

[maddythebeagle]

Quote from: Sheryl on July 10, 2006, 07:30:43 PM
My partner, who makes more than I do does this. If he's out of town on a payday, his wife will show up to get the check and take it to the bank so she can pay bills.


I admit, it took me a couple tries to figure this one out.

me, too I figured it was her business partner...

 

[Eagle43]

Been there, done that.  Last time was mid to late 60s.  Since then, I have seldom (never) been in debt.  Like Greenspan with inflation, I believe debt is the big rock that'll take you down, down, down.  

As to the 70% figure, I know people in that condition now; I have relatives who do it, despite  my counselling them to save 10% or more. So yeah, I can believe it.

 

[brewer12345]

Among our friends that are our age (30s), I can only think of two couples that aren't paycheck to paycheck:

- One couple had some bouts of unemployment and he now works a job where much of his comp is in "lumpy" commission checks that are hard to anticipate.
- The other couple are an actuary and a math major who works in an actuarial department.  They can at least do the math.

The other non paycheck to paycheck types I know are either nearing retirement age, or are small business people who have had to be disciplined about money to succeed.

 

[Martha]

I wonder what percent arent making it to the next paycheck?

My wife was telling me about one of her coworkers this morning.  She got a settlement, didnt report it on her taxes, didnt report some other stuff on her taxes, tried to file for bankruptcy while hiding some money she hadnt spent yet, now that she's run out of cash she's borrowing money until next weeks paycheck shows up.

In the meanwhile, there are some legal gears turning on the taxes and bankruptcy fraud.  I suspect she'll do jail time.  She'll almost certainly lose her license to do her job, as they usually frown on felonies and fraud in the medical business.  Her most recent bold financial move was to give a cell phone to her 20 year old unemployed boyfriend, who is friends with her 21 year old unemployed son.  He ran up a $250 bill the first month and she cant pay it.

Just a little glance at the slimy underside of life...

She might not do any time, depending on how much money she "hid." I had a guy who sold bankruptcy property out from under me as trustee. He took and spent or hid the money, a little less than $50,000. Even though I reported the crime and asked for him to be prosecuted, the US attorney had no interest: not enough money at issue. He said he would prosecute if it was more than $50,000.

I put the guy on a payment plan and after several years got the money back. What a pain the a$$.

 

[TromboneAl]

1. How do you think this 70% figure compares with what it was 10, 20, or 50 years ago?

2. What are the consequences of this for the market and economy?

 

[kaudrey]

I believe it too. I make more money than many of my friends, but I see some of them buying cars or other things that make me think, "I can't afford that, how are THEY affording it?"

Then I remember that I never see 30% of my salary (on top of taxes, of course) because it goes directly to various savings vehicles, so it's never there for me to spend.

 

[saluki9]

Re: Just heard a statistic that 70% of America is living Paycheck to Paycheck...

The first car that we bought after getting married we handed the dealer half the amount in the form of a personal check and half in the form of a check from our credit union (financed at favorable CU rates for only 2 years). The dealer was stunned! Said he rarely saw anyone come in that organized or with money in hand. I didn't think we were all that abnormal, but I guess most people do really just look for a "payment they can afford."

Had the same thing happen to me. 5 years ago we went to buy my wife's first new car. We were at the Honda dealership and we negotiated a great price on a civic ($100 over invoice) The salesman said "ok, you can head over to the finance manager now and he will arrange everything)

I wish I could have taken a picture of his face when we pulled out the checkbook and said "no, we would rather just pay for it now"

Priceless

 

[youbet]

Interesting thread........

From my personal observation, the 70% number sounds high. But our friends and relatives are a pretty financially conservative crowd, so that may account for that.

DW and I have never, ever purchased anything on time or borrowed money other than to purchase our home. And even that we paid off early.

We didn't really start out with a no-borrowing goal in mind, it just worked out that way. We were fortunate to graduate college debt free and both worked until the family came along. We both grew up in the inner city and were anxious to own our own home in the suburbs, so we saved aggressively to build up a significant down payment. I'm willing/able to do my own car maintenance, so we drove beaters I repaired myself. Etc., etc.

Eventually, with no car payments, mortgage payments or other time payments, we were able to step up investing and here we are, both RE and modestly FI. At arms length, I'd say our lifestyle didn't appear to be all that different from our high flying friends, except perhaps for travel and entertainment where we were admittedly frugal.

Again, we didn't really plan to do it this way, can't say for sure I'd do it again this way and certainly don't know if it was the best way. But it worked for us. No regrets.

 

[SteveR]

1. How do you think this 70% figure compares with what it was 10, 20, or 50 years ago?

I can't speak for 50 years ago but I do remember working more than 30 years ago.  I would say that in my circle of friends and family, there is not much of a difference today from 30 years ago as far as living paycheck to paycheck.  The differences I see now are that the folks that are my age seem to have more of a buffer than those much younger.  I think a lot of this has to do with the fact that by the time you get to 50+ you have already bought most of the "stuff" you want or need but at 30 -something you are just getting started with the "American Dream."  

2. What are the consequences of this for the market and economy?

Debt to income ratios will continue to increase and people will get more and more in debt as interest rates increase and the price of goods and services continues to rise while wages remain flat.  The market will suffer because there will be less cash to pump into it (although companies are currently cash rich and those that are not up to their ears in debt seem to have large cash reserves on the sidelines waiting for the signal to buy).  The market will survive and do well in the short run because of all the cash sitting around waiting for the market to move higher.  In the longer run I see it as a sprint and not a long term marathon because Joe Investor has no cash to invest.  

The economy will suffer for the same reason.  Businesses will buy new equipment and will start to build inventory but the Average Joe is already maxed on their credit cards, has already done the HELOC, is maxed out on his car(s) loans and the adjustable rate mortgage is taking more and more of his wages.  There is just not much left to spend on consumer items.  Add to this the increase in prices due to energy costs to make the good and to transport it and to feed all the middlemen along the way.  There is no blood left in the turnip.  

 

[justin]

Re: Just heard a statistic that 70% of America is living Paycheck to Paycheck...

70% probably includes a lot of the marginally paycheck to paycheck folks. The kind that contributes 5-10% to a 401k, dabbles with investments, maybe an IRA. Two wage earners in the family. A lot of the folks I know could squeak by with only one wage earner if the other one got fired (not FIREd). Out of my group of four twenty-something engineering buddies at work, 3 (including me) would be fine in the event of an unexpected period of a few months of unemployment.

The fourth guy is paycheck to paycheck in the classical sense - no emergency money cash reserve, spends every cent he makes, uses the credit card to balance the monthly liquidity/cash flow issues, etc. Although he does contribute a lot to his 401k and is very keen on investing. He even banks his annual raises in the 401k for the most part. Artificially constrained monetary scarcity to a certain extent...

Outside of the professionals I work with, my blue collar in-laws are a few paychecks away from financial disaster.

I'd guess closer to 40-50% of working folks are paycheck to paycheck, and another 30-40% have a small emergency fund of a month or less that, along with unemployment checks or severance, would get them through a few months of job searching.

People's attitudes towards money are strange and revealing. I recently was involved in becoming the lienholder and lender for a car purchase. After the trade-in, the dealer owed me (the former lienholder) a check for $600. I kept telling him to mail it to me, I didn't care if it sat in the mail for a day or two. He didn't understand that $600 wasn't worth a drive across town to pick it up a day earlier. I guess for a lot of folks that this used car dealer works with, $600 is the difference between paying your monthly bills or not.

 

[Mwsinron]

I get the sense over the years from people is if you can afford the monthly payment you can afford to get item A. I think it was just recently reported Americans this year have a negative savings rate. Fine with me I guess. Let others spend and drive the economy while Ill save.

 

[TromboneAl]

From a recent Paul Farrell article:

Why does America have a zero savings rate? Because America has no savings policy. Period. For more than a decade, Washington, Wall Street and Corporate America have favored a national spending policy at the expense of a national savings policy.

It also says:

From the 1950s through the 1980s, Americans were saving over 10% annually. Since then, our spirit of thrift spiraled into a negative savings rate.

 

[MasterBlaster]

Well to beat the savings rate drum once again.

The savings rate is defined as the rate of money that you (and we) put in passbook savings accounts and certificates of deposit. Money invested in stocks, bonds, IRAs and 401ks is not "savings"

By that definition I have very little "savings".

How much of your stash do you have in CDs and passbook savings accounts ?

The zero or negitive savings rate story makes a great headline but is meaningless when deciding if I (or we as a nation) have enough to FIRE.

 

[Lagniappe]

Re: Just heard a statistic that 70% of America is living Paycheck to Paycheck...

Well to beat the savings rate drum once again.

The savings rate is defined as the rate of money that you (and we) put in passbook savings accounts and certificates of deposit. Money invested in stocks, bonds, IRAs and 401ks is not "savings"

By that definition I have very little "savings".

How much of your stash do you have in CDs and passbook savings accounts ?

The zero or negitive savings rate story makes a great headline but is meaningless when deciding if I (or we as a nation) have enough to FIRE.

I had a very different understanding of what goes into the personal savings rate calcualtion. According to

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2005/08/07/BUG5JE423K1.DTL

The Bureau of Economic Analysis starts with personal income, which includes wages (from a job or self-employment), dividends, interest, rental income (if you are a landlord), and employer contributions to health and retirement plans.

From this it subtracts income tax and the employee's share of payroll taxes. The difference is disposable personal income.

From this it subtracts consumer non-investment expenditures, including retail sales, utilities, interest payments on consumer debt, and money people send to friends and relatives overseas.

For housing, the bureau counts rent for renters or mortgage interest, property taxes and insurance for owners. It does not subtract down payments or principal payments on a house.

What's left is personal savings.

"It's the amount of money out of your income that you don't spend and don't pay in taxes. It's what you can put in the bank or stock market," says Shoven.

It does include money put into stocks and bonds. What it does not include is appreciation of those assets once invested. This implies that we are not adding to our investments or our savings accounts.

Am I interpreting this correctly?

 

[MasterBlaster]

My understanding of the "savings rate" definition is that it only includes money put in "on deposit" ie. bank deposits.

Since these investment vehicles are losers in after tax, after inflation purchasing power it's no wonder that people have avoided them in droves.

My personal definition of savings is money that I invest and the gains from it. I know that's different from the official statistic.

I think most people think as I do. The official statistic is useful for bankers and makes a good headline but really isn't meaningful when thinking about how prepared Americans are for retirement.

 

[laurence]

I don't agree with including the appreciation of assets in the savings rate. I don't believe that's what it's measuring, and would lead to someone buying wave runners for 40k because his house appreciated 50k and he took out a home equity line as a "saver".

 

[jerryo]

As others suggest, this seems to depends a lot on how you define "living paycheck to paycheck." Since losing my wife five years ago, I've lived more or less paycheck to paycheck...putting about 20k a year in 401ks, but (with two kids in college and family income halved) also withdrawing 30-40k or so from savings.

On the other hand, my net worth has gone up more than 100k/year and I've got plenty of resources to use in a pinch ($2.5m+).

 

[youbet]

Hmmmmmm.......  It's becoming clear that the definition of "living paycheck to paycheck" varies greatly among us!  I think of living paycheck to paycheck as meaning your total net worth, including the value of the paycheck you most recently received, is only enough to carry you through to the next paycheck.

Folks living "paycheck to paycheck" would become unable to pay routine bills and living expenses quickly after losing their job even if they were willing to liquidate non-cash assets or pay early withdrawal penalities.

If we're calling folks who have zillions in their retirement accounts (various types), zillions in home equity, zillions in other non-monetary assets (collectibles, etc.) but who would have a liquidity or cash flow problem if their paycheck stopped living "paycheck to paycheck" I would say there is nothing to worry about!

Liqudity problems are easy to solve, even if you have to pay some penalties or sell equities at an inopportune time.  Just being broke and losing your job is a lot tougher nut to crack! 

 

[deserat]

Hmm, how many paychecks could you go without before you'd be in some serious debt?

I could probably go for quite a few years without a paycheck. And I'm sure most people here could do that as they are working towards not having a 'paycheck' for their lifestyle.

As for the 70% - I can believe it - when I re-fi'd the house for a 10 year payoff, the notary said she'd had none of those, a couple 15 year and mostly 30 year with payout of equity. Now, as the rates go up, there are quire a few defaults (my county was listed as fourth in northern California on default rates - ouch!)

Deserat

 

[Texas Proud]

Hmmmmmm.......  It's becoming clear that the definition of "living paycheck to paycheck" varies greatly among us!  I think of living paycheck to paycheck as meaning your total net worth, including the value of the paycheck you most recently received, is only enough to carry you through to the next paycheck.

Folks living "paycheck to paycheck" would become unable to pay routine bills and living expenses quickly after losing their job even if they were willing to liquidate non-cash assets or pay early withdrawal penalities.

If we're calling folks who have zillions in their retirement accounts (various types), zillions in home equity, zillions in other non-monetary assets (collectibles, etc.) but who would have a liquidity or cash flow problem if their paycheck stopped living "paycheck to paycheck" I would say there is nothing to worry about!

Liqudity problems are easy to solve, even if you have to pay some penalties or sell equities at an inopportune time.  Just being broke and losing your job is a lot tougher nut to crack! 

Youbet...

I would slightly disagree with you.. there are people who have bought a lot of 'stuff' and need to make payments... they live in a nice house, drive a nice car, take nice vacations,but not savings... they are living paycheck to paycheck, but living nicely...

If they lost their job, thier standard of living drops a long way and FAST... that is what I would call living paycheck to paycheck no matter how much you make..

 

[Cut-Throat]

Re: Just heard a statistic that 70% of America is living Paycheck to Paycheck...

The definition for 'living Paycheck to Paycheck' given by Oprah was. If you lost your paycheck, you would have to borrow money to eat. You had no savings at all. No retirement savings, no Stocks, No bonds - nothing.

You would have to sell furniture, cars, electronics etc or borrow money from friends or family. This also means these folks had a lot of credit card debt also and were making minimum payments on the debt.

 

[spideyrdpd]

http://www.bls.gov/cex/home.htm
If you look at avg income those numbers are just plain scary.
Of course I would never pay cash for a car. To me its just cheap money. I rather throw that money back into the market and pay off the car over time. I did try to put a cheap used car on a credit card. They wouldnt let me though. Something to do with the risk of me changing my mind and then disputing the bill.

We call how long you can live without your paycheck your wealth. Its nice when your wealth is atleast measured in yrs and not hours

 

[samclem]

Re: Just heard a statistic that 70% of America is living Paycheck to Paycheck...

My understanding of the "savings rate" definition is that it only includes money put in "on deposit" ie. bank deposits.

I think most people think as I do. The official statistic is useful for bankers and makes a good headline but really isn't meaningful when thinking about how prepared Americans are for retirement.

MB,

Not quite. The personal savings rate is basically the difference between personal income and personal expenditures. Thus, whether an individual puts money in a checkiong account or buys stocks, that still counts as savings. I've also heard folks say the PSR does not include IRAs, 401Ks, etc--this is not true. There are some problems with the PSR definition ("income" includes pay, dividends, and interest, but does not include appreciation of assets--inncluding real estate, stocks and bonds. "Expenditures" includes things like education expenses, etc as well as food, clothing, housing, insurance, etc).

The growing number of retirees is one reason for the falling PSR. For example, if your annual withdrawal from your savings is higher than your dividends and interest, then you had a negative PSR (even if your portfolio doubled that year due to increases in the value of your stock)

travellingval,
I think you are right.

For more on the personal savings rate, see:

http://www.onwallstreet.com/article.cfm?articleId=3328
and
http://www.frbsf.org/publications/economics/letter/2002/el2002-09.html