After more than a year of record inflation, rates have begun to cool. But it might not feel like it to most Americans.
The annual inflation rate remained up around 5% in April. And in a recent study, 61% of Americans stated their budget has been stretched tight.
Notably, the highest earners appear to be feeling the most pressure. Of Americans earning more than six figures, 49% reported living paycheck-to-paycheck — a 7% spike from last year.
Part of this may have to do with the fact that six figures can go a lot further depending on where you live.
For example, a $100,000 salary in New York City amounts translates to just under $36,000 after accounting for taxes and the high cost of living. Meanwhile, earning the same salary while living in Memphis will feel more like $86,000. The differences in cost of living help to explain why 69% of city dwellers live paycheck-to-paycheck compared to just 44% of suburbanites.
High-paying jobs are often highly concentrated in cities. So many workers may be tempted to relocate to a city in order to accept a job. But ironically, such a move might actually be a net negative on your finances after accounting for taxes and cost of living.
Escaping the Cycle
In general, high earners tend to spend more on conveniences like eating out, driving nicer cars, and taking more trips.
Increasing discretionary spending when income increases is a phenomenon known as “lifestyle creep.” It may be par for the course when things are going well, but when inflation is high, those spending the most will get hit particularly hard. That is especially true considering elevated interest rates imposed by the Fed’s inflation-curbing policy, which have made it more expensive to pay down debts like auto loans and credit card balances.
A good first step to stop living paycheck-to-paycheck is to find out where your money is going every month, and to set up a budget that prioritizes smart spending and saving. Some people need to make only a few minor changes to pull out of the paycheck-to-paycheck cycle, but others may need to get more radical.
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