If you are living paycheck-to-paycheck, by definition you aren’t saving and buying any assets. The folks who do have assets, those assets keep growing and compounding away. Left alone, that gap just widens relentlessly. Meanwhile, building up assets from nothing can feel agonizingly slow in the beginning.
So if you don’t make at least six figures already, should you just give up? It’s not your fault, and you can’t do anything about it, so why bother? I worry that this is the underlying message of certain media articles. As a small antidote, check out this chart that shows the percentage of households with a positive savings rate, broken down by income quartiles.
The data is taken from a 2016 survey by the US Bureau of Labor Statistics. Source: Personal savings: A look at how Americans are saving by Deliotte Insights.
Let’s use real numbers to add some clarity:
- A household in the 20th percentile earns about $24,000 per year. Yet, according this chart, ~30% of households that earn less than $24k manage to spend less than they earn.
- The 2nd quintile (20th-40th percentile) household earns between roughly $24k and $45 per year. A little over 40% of these households manage to spend less than they earn.
- The 3rd quintile (40th-60th percentile) household earns between roughly $45k and $75k per year. Close to 60% of these households manage to spend less than they earn.
- Let’s skip to the 80th to 90th percentile, where households earn between ~$120,000 and $170,000 per year. This is between 5X and 7X the 20th percentile and more than double the middle quintile. Yet even here, only a little over 70% of households have a positive savings rate.
It should not be surprising that households with higher incomes have a higher savings rate. Of course it is easier to reach financial freedom if you have a higher income. That’s just a mathematical fact.
Nearly 30% of households that earn between ~$120,000 and $170,000 per year spend everything they earn and then some. A higher income does not guarantee that you are not living paycheck-to-paycheck. When you look beyond the broad averages, you start to see the ability of households to differ. Everyone with a low income is not spending the same. Everyone with a high income is not spending the same.
This supports the notion that your actions still matter. Use your money to invest in yourself, increasing your skills and the ability to find more rewarding work. You can prioritize your expenses. It won’t be easy, and yes there will be setbacks and roadblocks in your way. In fact, it’s probably better to expect that it won’t be easy. As we should tell our children, success is not a straight line. “More often, a meandering and unexpected path is what leads to success”.