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80% of US Workers Are Living Paycheck to Paycheck

Male legs walking from one paycheck to another with crumpled money scattered about on the floor.
(Lee Serenethos/Dreamstime)

By Thursday, 05 March 2020 02:10 PM Current | Bio | Archive

The economy is really good right now—for some people. Zooming in from big picture trends like trade, interest rates, and corporate earnings to individual lives reveals a complicated picture of an American worker struggling to keep their head above water.

According to one recent study by Careerbuilder, a staggering 80% of American workers live paycheck to paycheck, including 10% of six-figure earners.

How is that possible? Every situation is unique, but consider that Americans hold $4 trillion in debt—and that doesn’t include mortgages. And while average income varies widely across the country, so does the average cost of living. A new study from Clever Real Estate breaks down paychecks from the 75 largest metro areas across the U.S. and discovers some interesting trends, including a surprising relationship between high rent and a high savings rate.

The Old Rules No Longer Apply

Traditionally, experts suggest living by rules like 50/30/20 (50% of your income on living expenses, 30% on discretionary spending, and 20% on savings) and not spending more than 30% of your income on rent. In 2020, those rules just aren’t feasible for most Americans.

Using per-capita, bi-weekly average income, the study calculated how much money the average citizen of 75 metros had leftover from each paycheck after taxes and expenses like housing, utilities, groceries, and health care. That number came to less than $140 every two weeks, nowhere near enough to maintain a healthy savings rate.

The differences in leftover income highlights the vast differences in average income across the country. Small McAllen, TX, where living expenses are quite low compared to the rest of the country, had the lowest level of leftover income, while even people who live in inexpensive San Antonio are barely breaking even. On the other end of the spectrum, pricey but high-earning Bridgeport, CT had the highest level of leftover income, with nearly $1,700 left over from each paycheck. This might sound obvious, but it bears repeating: it’s not what you spend, it’s what you make.

Higher Rent Equals … Higher Savings?

One of the most intriguing findings from the Clever study is the correlation between metros with high housing costs, and people who manage to save a lot of money.

Logic would seem to dictate that areas with a lower cost of living would have more money leftover after expenses, and would therefore be able to save more money. But even though Americans in urban areas pay much more in expenses, especially in areas like housing, they somehow end up with more money in their pockets after settling all their bills.

For example, compare an affordable city like San Antonio, where the average rent for a one-bedroom apartment is $995, to an expensive city like San Jose, where an average one-bedroom rents for $2,667. After paying expenses, the average San Antonio resident had nothing left from their paycheck, while the average San Jose resident had nearly $1,300. Differences in income can’t account for that entire gap. So what’s the secret?

The secret, it turns out, is living with roommates. San Jose had the highest percentage of adults with roommates of the 75 metro areas studied, with 17% of San Jose grownups initialing their leftovers in the refrigerator and pre-reserving TV times for the big game. As housing costs have steadily outpaced wage growth in the U.S., living with roommates has become a much more popular way to cut expenses. A recent Zillow study found that 30% of all Americans lived with at least one roommate in 2017, up from only 22% in 2000. So Americans who live in expensive areas have more money, in part, because they’re making sacrifices in other areas of their life to save money.

But that’s not to say that higher earnings don’t come into the equation. Regression analysis shows that, for every 1% increase in the cost of living, people earn an additional $352 annually. San Francisco is much more expensive than McAllen, TX, but the average person in San Francisco earns $99,400 a year, while  the average McAllen resident makes $26,400. When you take into account that the average San Francisco resident is almost much more likely to live with roommates, it’s no surprise that they have more money leftover at the end of the month.

So What About Homeownership?

A lot of these financial advantages evaporate when you look at things through the lens of homeownership. Let’s say that relatively cash-rich San Franciscan were tired of living with roommates, and decided to buy a house. Homes in the city have a median value of $1,082,771, which equates to a 20% down payment of just over $216,000. Assuming they save the maximum of $433 per paycheck, it would take 19 years to come up with a down payment. If you have to wait two decades to buy a house, you’re basically locked out of the market.

Contrast that with one of the more affordable metro areas. Residents of Jacksonville, FL save only $144 per paycheck, but with a much lower median home value of $227,269, a 20% down payment of a little over $45,000 would take only a little over a decade to save up.

The high cost of buying and selling real estate has led to the rise of discount real estate options, such as FHA mortgage. Low cost solutions are emerging to meet the demand for homeownership in America, but come with their own disadvantages and risks. For example, low down payment mortgages result in higher monthly premiums and PMI.

The lesson? Residents of high-cost, high-earning areas can live a relatively comfortable lifestyle, but it comes with some serious sacrifices, which include less privacy, and delaying or even forgoing homeownership entirely. Increasingly, the question isn’t whether it’s worth it; the question is, do most people even have any choice?

Dr. Francesca Ortegren, Ph.D. is a Research Associate at Clever Real Estate where she focuses on helping people understand complex data, real estate, finances, business, and the economy by researching various topics, analyzing data, and reporting useful insights for general consumption.

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Residents of high-cost, high-earning areas can live a relatively comfortable lifestyle, but it comes with some serious sacrifices, which include less privacy, and delaying or even forgoing homeownership entirely.
workers, living, paycheck, cities, american
Thursday, 05 March 2020 02:10 PM
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