Why Upper-Middle Earners Are Living Paycheck to Paycheck

Even those with six-figure incomes can struggle financially

Living paycheck to paycheck is an unpleasant financial reality for many Americans. In fact, 59% of adults in the U.S. admit to living paycheck to paycheck, according to Charles Schwab's 2019 Modern Wealth Index Survey. Almost half (44%) have credit card debt and only 38% have an emergency fund.

A surprising number of upper middle-income earners—those making six figures—are also scrambling to make ends meet, other research shows. A recent study by global advisory firm Willis Towers Watson found that 18% of employees making more than $100,000 annually live paycheck to paycheck.

With household debt ballooning and the cost of living skyrocketing in some parts of the country, a six-figure income doesn’t always translate into financial security. The 2020 economic crisis has, of course, made everything worse; all kinds of families are now worrying how they will pay their bills. This article looks at the underlying problem that magnifies the impact of a global crisis or other major financial situation.

Ket Takeaways

  • Almost one-fifth of Americans with a six-figure income live paycheck to paycheck.
  • A majority of Americans who consider themselves middle class have an optimistic view of their finances, even though many don’t have a substantial emergency fund.
  • A high cost of living, due to housing and education costs, is among the reasons why some high earners live paycheck to paycheck.

Living Paycheck to Paycheck: Middle vs. High Income

According to Northwestern Mutual’s 2018 Planning and Progress Study, 68% of Americans identify themselves as middle class. A majority (78%) said that incomes under $100,000 qualify as middle class. About half (52%) said middle class ranged between $50,000 to $99,999, while 26% said less than $50,000.

Interestingly, the study showed that middle-class Americans tend to have an optimistic view of their finances. They are more likely to feel confident that they can strike the right balance between spending now and saving for the future (71%) than those who aren't middle class (42%). The question is whether their expectations and beliefs are an accurate reflection of their situation.

With more financial resources at their disposal, it’s natural to assume that higher-income earners would have significantly more in savings, but that’s not always the case as the study by Willis Towers Watson and other research show.

In the the Federal Reserve’s 2018 Survey of Household Economics and Decision Making, 40% of Americans said they would struggle to come up with $400 to pay for an unexpected expense. And 17% of households with an income of $100,000 or more said they would have trouble coming up with $400.

Financial planners often recommend that an emergency fund should have three to six months' worth of expenses.

What’s Behind the Cash Crunch?

Understanding why so many high earners struggle begins with pinpointing potential causes for their financial woes. Debt could be one culprit. According to the Federal Reserve Bank of New York, total household debt in the U.S. reached $14.15 trillion in the fourth quarter of 2019. That figure exceeds the previous peak reached in 2008. Most of the debt is mortgage-related, although student loans represent an increasingly larger share of what Americans owe.

Research on the Fed’s 2018 survey conducted by the Center for Retirement Research at Boston College cites debt—credit card balances, mortgages, and/or student loans—as the reason why households earning $100,000 or more would struggle to come up with $400 to pay an unexpected bill.

$ 1 trillion

The amount of credit card debt in the U.S., according to the Federal Reserve Bank of New York.

That doesn’t necessarily mean that higher earners are racking up debt because of poor personal spending habits. For some Americans who earn six figures or more, the root cause may be a too-high cost of living.

Home values, for example, have increased by almost a third since 2012. The median sales price of a house rose to $327,100 at the end of 2019, compared to $251,700 at the end of 2012, according to the Federal Reserve Bank of St. Louis.

In certain markets the demand for housing has pushed both purchase and rental prices through the roof, eating up a larger share of high earners’ salaries. A Magnify Money study, for instance, found that San Jose, Calif., is the worst city for living on an annual income of $100,000. After deducting housing and other monthly expenses, residents end up with a deficit of $454 a month.

Those monthly expenses include payments to student loans and other debts, healthcare, transportation, and childcare. As children get older and prepare to go to college, the burden for some high-income families increases because those from affluent families qualify for limited financial aid. For the 2019-20 academic year the average cost of tuition, fees, and room and board at a public four-year university was $38,330 for out-of-state students. Needless to say, this can add to the strain on six-figure earners.

The Bottom Line

As the data show, a paycheck-to-paycheck lifestyle isn’t exclusive to lower-income earners. A higher salary may not stretch as much for those facing a higher cost of living, especially if they rely on credit to cover the gaps.

Finding ways to break the paycheck-to-paycheck cycle is vital to long-term financial health. Increasing family income is an obvious—though not necessarily possible— solution, especially in difficult times. Reducing expenses and eliminating debt are more immediately useful in making the most of what people earn.

Article Sources
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  1. Charles Schwab. "2019 Modern Wealth Survey."

  2. Willis Towers Watson. "Despite Improvement in Their Financial Wellbeing, U.S. Workers Remain Worried."

  3. Northwestern Mutual. "2018 Planning & Progress Study."

  4. Federal Reserve. "2018 Survey of Household Economics and Decision Making," Pages 2, 10, 21-23, 56.

  5. Federal Reserve Bank of St. Louis. "A Snapshot of Record-High U.S. Household Debt."

  6. Federal Reserve Bank of New York. "Household Debt and Credit Report."

  7. Center for Retirement and Research at Boston College. "Why Are So Many Households Unable To Cover a $400 Unexpected Expense?"

  8. Federal Reserve Bank of New York. "Total Household Debt Rises for 19th Straight Quarter, Now Nearly $1 Trillion Above Previous Peak."

  9. Federal Reserve Bank of St. Louis. "Median Sales Price of Houses Sold for the United States."

  10. Magnify Money by Lending Tree. "10 Places You Can Earn Six Figures and Still Feel Broke in 2018."

  11. CollegeBoard. "Trends in College Pricing 2019," Page 3.

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