LendingClub Corporation released findings from the 11th edition of the Reality Check: Paycheck-To-Paycheck research series, conducted in partnership with PYMNTS.com. The Financial Distress Factors Edition examines the financial lifestyle of U.S. consumers who live paycheck to paycheck, the factors that cause financial distress – life-cycle events or life-altering events – and the impact of these financial stressors on their lives.
Key Takeaways: 65% of paycheck-to-paycheck consumers have experienced a financially stressful event in the past three years, with sudden income disruptions such as losing a job being the most common. Moreover, half of paycheck-to-paycheck consumers say their salary only covers basic expenses and is one reason behind their financial distress.
“Consumers have experienced a tough last couple of years as different factors have affected their financial lifestyle and there seems to be little relief in sight,” said Anuj Nayar, LendingClub’s Financial Health Officer. “While the specific nature of the event that causes financial distress may vary, it’s clear we all need to plan for the unexpected. It’s simply a matter of time before something will come up to knock even the best laid financial plans askew.”
Living paycheck to paycheck means devoting all of one’s salary to expenses with little to nothing left over at the end of the month, yet many of these consumers remain credit-worthy, actively managing their cash flows in real time. Paycheck-to-paycheck consumers fall into two categories: those who can pay their monthly bills easily and those who struggle to do so.
The Impact of Major Life Events on Living Paycheck To Paycheck
To understand the drivers of financial distress, this report surveyed consumers about life-cycle events such as getting married or divorced, birth of a child, moving residences and retirement, and financially life-altering events such as a job loss, serious illness, disability, or major unexpected expenses such as a natural disaster or lawsuit.
According to the data, more than half of U.S. consumers have faced either a life-cycle event or a life-altering event in the last three years. Life-cycle events, such as marriage or having a child, are the most common events, with 38% of consumers overall having experienced these situations in the last three years. The share jumps to 51% among millennials but drops to 30% among baby boomers and seniors. Life-altering events such as losing a job or facing serious illness in the household occurred to 33% of all consumers in the last three years.
While low income is cited as a cause of financial distress, paycheck-to-paycheck consumers from high-income brackets and large households cite paying for a family member’s expenses as a driver of financial distress. In fact, nearly 40% of paycheck-to-paycheck consumers earning more than $250,000 say this is a factor driving their financial struggles.
How Paycheck-To-Paycheck Consumers Save
One in five consumers living paycheck to paycheck have spent more than what they have earned in the last six months, with those struggling to pay bills seeing their savings cut in half over the past year. Close to half of all paycheck-to-paycheck consumers say their salary only covers basic expenses and is a reason behind their financial distress. While many consumers leverage credit as a financial tool to manage expenses and cash flow during financially distressing events, high-income consumers tend to use it more.
“Setting an automatic transfer to a savings account, even if it’s a small amount, can help you weather the next storm because it’s not if you’ll need the cash, but when. Credit can also be an effective tool to help with expenses during financially distressing events, but those struggling financially should exercise caution,” continued Nayar. “Credit card interest rates are rising, and, if you don’t intend to pay your bills in full monthly, you could potentially get into a steep revolving debt trap. For those looking for relief, consider refinancing high-interest debt into a lower cost installment loan.”