Paychecks are going up — but prices are too

There have been plenty of reports of wage gains over the past year; however, they haven’t kept pace with costs.

Nearly half of all paycheck-to-paycheck consumers say their salary only covers basic expenses, while some higher-income earners say paying for a family member’s expenses has proved a significant driver of financial distress.

This means there’s little left over at the end of the month for discretionary spending or savings.

And what is left over is also getting eaten away by record-setting inflation. The Bureau of Labor Statistics’ Consumer Price Index shows inflation hit a scorching 9.1% for the month of June.

Food at home was up over 12% for the year, while gas spiked by nearly 60%.

To rein in inflation, the Fed ticked up interest rates by 0.75% in June, but it will take time for the effect on prices to show.

For now, with another announcement coming after the Fed's next meeting July 26 to 27, it’s simply becoming much more expensive to borrow money, too.

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COVID encouraged bad spending habits

While low-income earners are facing the brunt of the effects, some middle- to high-income earners are also struggling.

“I think that COVID kind of warped everything financially,” says Rod Meloni, business editor at Local 4 News in Detroit and a certified financial planner.

Plenty of consumers who were still employed through the pandemic were able to use the time to hit pause on some of their usual expenses. For example, remote workers saved plenty on gas, work travel and lunches out.

But, Meloni counters, that doesn’t mean they put all that cash in savings. Many took it as an opportunity to spend on other things.

As the PYMNT study shows, people’s savings have taken a hit over the last year, too. For those struggling to meet their monthly bills, their average savings plummeted from $4,065 in May 2021 to $2,464 in May 2022.

And the end of restrictions and lockdowns this year has also encouraged people to spend hard to make up for lost time, causing expenditures on travel, dining in restaurants and other activities to surge.

“I think that we’ve sort of gotten out of the habit … of being intentional about what we're going to buy,” Meloni explains.

“And then when inflation ticks up and gas prices go up and groceries go up in unexpected ways — all of a sudden now, you have no discretionary spending left because you've not planned it.”

More: Compare savings accounts

The issue is becoming even more pressing

For the chunk of paycheck-to-paycheck consumers whose salaries comfortably cover basic expenses, Meloni believes that part of the issue may be a lack of financial education — some people see overspending as the limit.

“I don't think it's anybody's fault, necessarily. It's just that we need to pass [financial literacy] on. And one of the larger problems is I think a lot of parents don't know.”

He suggests that people write down how much they spend each month and compare that number to how much money they’ve brought in. One of the best pieces of advice Meloni has ever received was to set 20% of your income aside as savings.

And for those making more than enough to meet their bills, it’s time to think more long term.

“I think that the notion that you have unlimited discretionary spending needs to be dispelled,” says Meloni. “I call it the hamster wheel … because the faster you spin the wheel, you get no farther ahead.”

Getting off the hamster wheel takes some planning. One of the best tools to help break the paycheck-to-paycheck cycle is simple: creating a budget.

Budgeting for three to six months of expenses is key to preparing for emergencies like an unexpected job loss, says Meloni.

And there’s no better time than ever to take this on, with talk of a recession on the horizon.

“I think that we all need to start getting ready for what is coming … it absolutely is going to get tough,” says Meloni.

“And the only way to weather that storm is to gain control, understand what you've got, what you need and then come up with a battle plan to go up against it.”

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About the Author

Serah Louis

Serah Louis

Senior Staff Writer

Serah Louis is a senior staff writer with MoneyWise.com. She enjoys tackling topical personal finance issues for young people and women and covering the latest in financial news.

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