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When I wrote “The Joneses are Brokes!” in February of 2016, readers were alarmed by a Federal Reserve report stating that 47% of American households couldn’t cover the cost of a $400 emergency without having to borrow money. I warned about the long-term consequences of living beyond one’s means. I introduced the term “lifestyle inflation”. I used “The Joneses” to represent a typical American family and they (as the title indicates) were broke.
Here we are, over six years later, and things have NOT changed for the better. Forget about “Lifestyle Inflation,” we are faced with good old-fashioned “Inflation Classic” for the first time in a long time. Back then, I wrote about the average American Family struggling to cover their expenses. Today, I’m here to tell you that “The Rich” aren’t doing that much better.
According to the US Census Bureau, a household earning more than $250,000 per year is in the top 5% of earners in the country. A recent finance industry survey found that of that group, 35% of them are living “paycheck to paycheck”. What this means is that they are spending nearly every dollar that they make and have almost nothing left at the month’s end.
Being in the top 5% of earners is one thing, but how is everyone else doing? Over sixty percent of all survey participants reported living paycheck to paycheck in April of 2022. This led to an increase in the use of credit cards. Those cards may be about maxed out. Remember in 2016, when the Joneses couldn’t cover a $400 emergency without borrowing? According to last week’s Federal Reserve Report on the Economic Well-Being of US Households, about 11% of American households report that they can’t cover that $400 expense by any means! This means that they have no more credit, no family or friends to borrow from, and no assets to sell.
Any true financial planner will talk to a new planning client about the importance of having an emergency fund. This is specifically some money set aside for that $400 unexpected expense. In fact, I can’t think of a single case where I wouldn't recommend substantially more than that $400! If you don’t have an emergency fund, I have good news for you. There is a simple way to get one. Understand that I said “simple” and not necessarily “easy.” Spend less money than you make!
I understand that people are feeling strapped for cash. This is perhaps more true now than at any time in recent history. I am still very confident that almost anyone can be saving money every month. How often do you eat out? Cook at home. How many streaming services do you subscribe to? Cut the list down to one or two. Do you have a membership to a gym that you never visit? Cancel it. You get the idea. There is something. Cut your monthly costs and save the difference. You’ll be amazed at how quickly your savings add up to more than $400. Congrats. You’re doing better than the Joneses. Actually, the very fact that you are saving money means that you are no longer living paycheck to paycheck and you’re doing better than 35% of the rich! Smile. You are not broke.