Is it Your Income or Spending Calling the Shots?

The paycheck-to-paycheck tango is familiar to many, and it has a common refrain: ‘If only I made more money.’ But is this dance a result of an income shortfall or spending habits gone astray?

Let’s say you meet an extremely successful professional who earns $1 million every year, spends $1 million every year, and is lamenting the fact that they can’t save a dime for retirement. They are living paycheck to paycheck. After you get through feeling sorry for them, would you suggest this person doesn’t make enough or rather spends too much?

The answer seems obvious: Income level looks mighty fine so that person should rein in their spending, put some money aside, and invest it for the future.

What about a person who makes $65,000 per year and spends $65,000 per year? The common refrain, ‘If only I made more’ quickly springs to a lot of minds but that shouldn’t change the overall thought process. Rather than jumping on the ‘income too low’ side of the equation, give the ‘spends too much’ side its due.

A two-sided struggle

The struggle to make ends meet is real, but the reason why shouldn’t start with the blanket assumption that everything spent is absolutely necessary and so by default, it must be an ‘income too low’ problem.

Living paycheck to paycheck is influenced by a combination of both income and spending factors. It's essential to consider each side of the equation when addressing financial challenges.

On the income side, individuals may face difficulties if their earnings are insufficient to cover ‘necessary’ expenses. This could be due to factors such as a low-paying job, limited work hours, or unstable employment.

On the spending side, it's important to assess whether expenses are aligned with one's income, which includes recognizing the difference between ‘necessary’ and ‘nice-to-have’ expenditures. Overspending on non-essential items, accumulating high levels of debt, or not budgeting effectively can contribute to living paycheck to paycheck.

Spend on the future

The income side might be tough to adjust, but it’s not impossible. For example, you might explore new job opportunities, negotiate a salary increase, or start a side hustle.

When you look at spending, recognize that once basic needs are covered, you are left with personal choices. If left unchecked, those choices often default to spending on items today which in effect is choosing not to ‘spend’ on saving for the future.

In 2000, a study on wealth accumulation noted that many Americans say they earn just enough to get by and struggle to get caught up on bills, implying they don’t earn enough to also save money (not unlike today):

Yet in other developed countries, the savings rate at all income levels is much higher than in the United States. Even in Canada—in many respects similar to the United States—the personal saving rate is almost twice as high as in the United States. Such international comparisons alone suggest that saving depends on much more than lifetime earnings.

While savings rates among countries have been shifting since this study was published, the key takeaway has not changed. Your savings rate is heavily dependent on your personal spending choices and is the single most important factor impacting your lifetime wealth accumulation journey—especially in the early years.

The recent trend has not been encouraging. The personal savings rate (which since 1960 has averaged 8.8% of disposable income) is getting close to an all-time low.

In September 2023, the saving rate was 3.4%, less than half the long-term average and continuing a 6-month downward trend.

Monthly US Personal Savings Rate: 1959-2023:

Get up and dance

You can use ‘I don’t make enough’ as an excuse or a call to action.

Yes, life is expensive, but by giving equal weight to both sides of the income/spending equation, you can see with clear eyes all your cash flowing in and out, and make better-informed decisions.

Find the balance that works for you—managing expenses sensibly, increasing income where possible, and developing a financial plan that aligns with both short-term needs and long-term goals.

When saving and spending bring you equal happiness, you are well on your way to breaking the cycle of paycheck to paycheck.

As always, invest often and wisely. Thank you for reading.

The content is for informational purposes only. It is not intended to be nor should it be construed as legal, tax, investment, financial, or other advice. It is merely my own random thoughts.

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