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Debt To Blame on America’s Paycheck to Paycheck Living


Statistics show that two out of five Americans would be hard-pressed to finance a $400 emergency bill.

The 2018 Survey of Household Economics and Decision Making conducted by the Federal Reserve outlines this fact. They asked some 12,000 households about the decision making and well-being surrounding their finances, and their study disclosed the inclination that some families would either have to sell something or incur debt, to pay off their unexpected expenses. 

The researchers asked people how they would handle an unexpected $400 outlay of cash. About 4 out of 10 responded along the lines of they either can’t, will have to borrow money, will have to sell something, or will have to disregard other upcoming payments, such as utility bills. 

But one confusing thing is another study administered by the Federal Reserve, the Survey of Consumer Finances, reflected that 8 out of 10 households have at least, or more than, $400 in their respective bank accounts. Many families have at least enough money to finance sudden situations of that amount. And for some reason, some still find it hard to come up with $400, even if they already have it on hand. 

Anqi Chen of Boston College Center for Retirement Research commented that the situation is a little perplexing.  

“If that many people can’t cover a very small, unexpected expense, how can we expect them to save for retirement?” he further remarked. 

So these results and series of events beg the question…


What’s The Deal?

Researchers tried to find the reasons for the conflicting results of the surveys, and they ultimately landed on an answer: obligations and debt. 

Many of the families and households who have $400 or more stashed in their bank accounts have the amount already reserved for prior obligations and purposes. And frequently, these obligations are for upcoming credit card bills. When the Boston College researchers deducted from the account balance their unresolved credit card debts, the results suggest that these credit card loans make up the bulk of their savings. 

Then, the average credit card interest rates are 12%. But a decade after, the credit card interest rates ballooned to 18%. Credit card interests are some money sinks, and households would fare much better to pay them off sooner rather than later.

Debt gobbles up cash. Even the wealthier households are not safe from the debt quicksand. 

The Survey of Consumer Finances revealed that almost none of the families with incomes over $100,000 have account balances of less than $400. But about 17% of the same households asserted that they would have trouble even with only a $400 expense. 

Higher earners have more disposable income, and they are granted credit because they have the means to pay them back. In turn, their credit purchases have additional tacked on costs, such as mortgages and installment loans. Many more others have student loans. The affluent’s bank account is not entirely free; they’re tied to obligations

The conclusion is this: many Americans are broke because of debt. Their salaries rarely go to their pockets; they’re used to financing.

These loans could be looked at and blamed as one significant reason why Americans adopt the paycheck-to-paycheck lifestyle, how can you save for the future when you have to pay for the past?