Thirty-eight million American households, which is roughly one-third of all U.S. families, live hand to mouth, according to a new report. But a majority of them are not technically considered poor -- and in many cases, have made good investments.
New research from the Brookings Institute shows that roughly 25 of the 38 million Americans living paycheck to paycheck have a median income of $41,000, which is in line with the national median income of $43,000.
"Many households are saving," explains Greg Kaplan, an assistant professor of Economics at Princeton University and co-author of the study. "They are just not saving in liquid forms, and the data shows that's not necessarily bad because illiquid investments are generally better investments."
These illiquid assets, which Kaplan says are mostly homes and retirement accounts, make it hard for people to access any of their value. So, especially in a tough labor market, that cash cushion is not readily available for many.
%VIRTUAL-article-sponsoredlinks%The data also finds that often times for this group, the living-paycheck-to-paycheck situation is not permanent. That distinguishes these Americans from the estimated 12 million considered "poor Americans living hand-to-mouth" with income about half of their counterparts' at $21,000.
"The study suggests that this is not a label stamped on their head," says Kaplan. "It's a phase for the households, happening once or during periods of time."
This group, coined the "wealthy-hand-to-mouth," has substantial investments and is generally older, with a peak age of 40. The poor -hand-to-mouth" pool is most frequently younger with little or no assets. On top of living paycheck-to-paycheck, both groups have "large marginal propensities to consume out of small income changes -- a key determinant of the macroeconomic effects of fiscal policy," the report says.
That means, they respond to stimulus policies much the same way as those with no assets, spending all of their extra disposable income almost immediately.
This huge group of Americans, which Kaplan points out has been around in similar numbers since the 1980s but have not been looked at closely, redefines the image most might have of those living hand-to-mouth.
"Often times, people are impulsive, and so it may be a good thing to put your money [into a house or a retirement account]. There are the unlucky few where it isn't a good idea, but most times it is," says Kaplan. "Living paycheck to paycheck isn't exclusive to the poorer pool of people but it is, in fact, creeping into the middle class."
7 Simple Habits to Save a Pretty Penny (or $100)
Middle-Class Lives Hand to Mouth, but It's Not All Bad News
Have you ever heard of the 30-day rule? As a frugal guy, this is one of my favorite rules in spending. If you’re about to spend any more than $20 on something that is unnecessary, don’t. Instead, put the item down and wait 30 days to buy it. You’ll be amazed at how much money you save by not making unnecessary frivolous purchases.
I literally mean freeze your credit cards. It seems a bit extreme, but think of it this way. The average credit card comes with a 13 percent or higher interest rate. By simply not using credit cards as often, you’ll save a ton. So, get a plastic sandwich bag and put your credit cards in it. Fill it with water, zip it up and throw it in the freezer. Without easy access to those tempting pieces of plastic, you probably won’t use them as much. However, they’ll still be around -- in an emergency, you can retrieve them from the ice.
Have you ever looked around your house, seen a few items and thought, “I could have made that!” You probably could have. The only thing is, you didn’t. Instead you paid for it. From now on, before you buy something you think you can make on your own, give it a shot. I saved a little over a hundred bucks about two weeks ago. I needed a new bird cage for my fiancé’s doves. Instead of buying a cage for $200, I made one that was far bigger for less than $80.
Did you know that a clean air filter in your car can lead to 7 percent more fuel efficiency? That means at current gas prices, with a clean air filter, you’ll save about $100 a year, if you drive the average 10,000 miles.
How often on the way home from the office do you want to stop for a convenient quick meal? You’ve had a long day, and it feels justified. But it costs much more than a home-cooked meal. The answer is your slow cooker. Use it to prepare your meal in the morning on days you know will be rough. This way, you can skip the fast food and rush home to an already ready home-cooked meal.
Do you pay a maintenance fee for your bank account? Why? Tons of banks offer checking and savings accounts without them. Look to your local credit union or even switch to an online bank. When comparing your options, also look at the interest you can earn. Currently, I get about 3 percent on checking and about 3.4 percent on savings, but who knows what kind of great deals you can find?
I’ve had tons of options to sign up for customer rewards programs and I was just too busy. So, I didn’t sign up. Then one day, I realized that I was paying for rewards I wasn’t getting. The cost of the rewards obviously trickles down to the end consumer. So, if the end consumer doesn’t take part, he or she loses money in the process. Since I’ve signed up for every reward program around me, I’ve saved at least 20 or 30 bucks a month in rewards.