I think most of us know people who live paycheck to paycheck. I used to be one of them during my student days at A&M and even in the early months of my career. These days, I'm financially very stable, but I remain pretty paranoid about potential financial setbacks. My mindset has always been to sacrifice some good things now for the sake of long-term peace of mind. For example, I would rather skip spending $10k on a trip to Europe and put that money towards any debt I might have. I paid off my house completely so I don't have to worry about that while giving up some percentage interest by investing the money. This approach has allowed me to avoid the stress of living paycheck to paycheck.

I get that there are people who live this way due to circumstances beyond their control like lack of education, health problems, previous debt etc. I'm not talking about those situations. I'm talking about people who make a decent income but still live on the financial edge.

I've always wondered why people in these situations continue to live paycheck to paycheck. Years ago, I had a coworker who was a UX designer. One day, payroll let us know that due to a direct deposit issue, our salary would be delayed until Monday. HR offered to cut checks for anyone who needed it earlier. I didn't mind waiting until Monday, but my coworker rushed to HR to get his check. When I asked him why, he just said tersely, "I need the money." It blew my mind that a delay of a couple of days would cause so much tension. If you can't manage for 48 hours without $2.5k, something's seriously wrong with your financial planning.

Now that I'm older and thinking more about retirement, my paranoia has only grown. I don't want to end up in my 70s living in a rundown apartment with all kinds of chaos around me. I've visited places like that, and it's not pretty. Over the years, I've sacrificed a lot of luxuries and avoided FOMO to pay off my debts and invest in building up enough assets to weather unemployment/bad economy or retire comfortably. It's not easy, but honestly, it's not that hard either. It just takes some discipline and the ability to resist the temptation to chase every shiny object.

What do you guys think? Why do some people choose to live this way even when they don't have to?

agnerd said:

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Lot of people are just financially illiterate. I've been amazed to find out how many people cheated through middle/ high school math classes and don't really understand how compound interest works. I think that's the key. Either you understand how compound interest works and you put it to work for you, or you don't.

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I'd say you have to put it to work for you or get steam rolled by it. When you are in debt compound interest is working for the banks and against you.

Having gone to the state fair yesterday, anyone pondering this question should just go their local fair and people watch. It is both fascinating and depressing.

Howdy Dammit said:

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You can also be paycheck to paycheck by maxing out 401k. So on paper you have money, but it's not accessible.

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Yes. I am doing that right now but I have other assets so not P2P. Maxing out 401k means you are taking a long term view which is a good thing but you have to balance with near term expenses like rent, food etc. I think everyone should max out 401k. Limit is 23k if younger than 50 and 30.5k if over 50. It takes some time to be able to get there.

401k is accessible. You have to pay a cost though, so that should be a last option.

I doubt very much the person in OPs story is living paycheck to paycheck because he was saving so much for retirement. Anyone doing that would at least have an emergency fund equal to a single paycheck that could float him for a few days if a direct deposit was late.

The Porkchop Express said:

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infinity ag said:

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What do you guys think? Why do some people choose to live this way even when they don't have to?

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It's more fun.

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Also most people don't stress about it and think they are fine... Zillow says they are millionaires on paper so it's all good.

Tatem said:

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I wonder if it's a situation where they want to keep up with the Jones'.

I feel like people have cars/vacation/travel sports they can't afford in order to keep up with appearances.

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This. People feel the need to keep up. Friends of mine and former educators felt like they needed to keep up with friends in good paying corporate jobs, instead of accepting their current income.
On a related note, I think people consider how much house and cars they can afford before saving. Should be the other way around. Put money away in a tax deferred savings and emergency savings account, then figure the house and car note. Worked for us. My wife retired at 57 and I retired at 58.

permabull said:

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agnerd said:

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Lot of people are just financially illiterate. I've been amazed to find out how many people cheated through middle/ high school math classes and don't really understand how compound interest works. I think that's the key. Either you understand how compound interest works and you put it to work for you, or you don't.

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I'd say you have to put it to work for you or get steam rolled by it. When you are in debt compound interest is working for the banks and against you.

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I'd say most people are financially illiterate regardless of income level. The average person in this country doesn't have savings, let alone a retirement account. You'd be shocked at the number of people who don't even put the money into their 401k to get the full match from their employer even though that's additional money without additional work...other than the work of delayed gratification. People don't understand the mortgages they sign, they're just concerned about what they can buy even if it's irresponsible. It's even worse with car loans because they're not regulated like mortgages are. People roll negative equity into new loans every single day. They finance as much as they can for as long as they can. And sadly it's not just a world where their actions only hurt themselves, their poor decisions impact everyone, even those with good credit. Too many people think there's consequence-free money out there when there isn't, and that naivety makes everything more expensive for the entire populace.

toucan82 said:

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Ummmm.... Rule 1?

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You are interested in an elderly widow?

Quote:

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I'd say most people are financially illiterate regardless of income level.

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I absolutely agree with this. I manage our finances because my husband doesn't know which end is up when it comes to managing money. He understands the basic concept of interest rates and whatnot, but he doesn't understand differences in loan products, investments, retirement options, how to leverage debt, etc. His eyes glaze over when I try to go over our books with him.

I would add that this financial illiteracy often makes things worse for people with larger incomes because they just don't know what to do with the money, so the default position is to spend it.

permabull said:

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I doubt very much the person in OPs story is living paycheck to paycheck because he was saving so much for retirement. Anyone doing that would at least have an emergency fund equal to a single paycheck that could float him for a few days if a direct deposit was late.

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It's possible. The event was from 2004, 20 years ago. He was a UX designer but I don't know if he was really paycheck to paycheck or not because we didn't discuss. I just saw that he tensed up when he had to wait a few days for his money which leads me to believe so.

Howdy Dammit said:

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You can also be paycheck to paycheck by maxing out 401k. So on paper you have money, but it's not accessible.

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we were like this a while, kind of. Wife quite her job, and just part time subbed. Weren't saving anything, and every dollar went to pay off monthly credit cards. But my employer gives me 15% into retirement, so we were still taking care of retirement. Then I get a ~30% bonus in December, so all of a sudden flush with cash, which I could throw 5 figures of into my brokerage acct or iras.

I know a guy who between him and his wife make around $300k a year. They both claim to be "maxing out" their 401k but they mean the get the max company match which is 5% if you put 5%. So they are patting themselves on the back for putting $30k a year into their retirement, but I know for a fact they have taken 401k loans out multiple times. So they are doing this song a dance about how responsible they are while letting it all slip out the second they build up any sort of sizable balance.

permabull said:

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I know a guy who between him and his wife make around $300k a year. They both claim to be "maxing out" their 401k but they mean the get the max company match which is 5% if you put 5%. So they are patting themselves on the back for putting $30k a year into their retirement, but I know for a fact they have taken 401k loans out multiple times. So they are doing this song a dance about how responsible they are while letting it all slip out the second they build up any sort of sizable balance.

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There are many other ways to save for retirement, and just remember many baby boomers didn't necessarily have a 401k until later in life.
My dad didn't until his mid 40s, and him and mom are living their best life in retirement.

Do you have
1. A working spouse and/or
2. a decent financial planner?

Those things together can change the lives of most middle class income earners, help you to structure finances, savings and tax arrangements to your benefit and get you into the "wealthy" class. Hint: deferred vacations, making do with ten year old cars and living affordably are part of that package. I understand some people have specific challenges, but making smart financial decisions and being financially literate are crucial to securing your future.

Many years ago, my wife and I bought our first starter home. It was a new yet modest house. It was well within our means of what we were earning at the time.

Across the road that ran along our subdivision was another subdivision but the houses were much bigger. At night, you could see in many of these homes because they had no blinds or curtains on the windows.

I lived next door to a local cop and mentioned this to him. He said they get calls sometimes to those homes and a lot of them have very little furniture in them. A lot of the owners had bought above their means. He attributed it to people chasing a distorted view of the American dream or what they thought success meant. Some just trying to keep up with the Joneses.

I think moderation is important here. Do what you can afford but live within your means.

Green2Maroon said:

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I think moderation is important here. Do what you can afford but live within your means.

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I agree. But you can make a case for both sides.

Many "spenders" have probably not yet had to pay the piper and may never have to (our country's economy is incredibly reliant on these people, so our country's government will continually bail them out).

Many "savers" end up getting taxed into oblivion and die or struggle with their health before getting to take advantage of their wealth (or see it enjoyed by their offspring or offspring's offspring). I know I am not alone in having parents that were very conservative with their spending to get to retirement and were met in retirement by health issues.

But at the end of the day, no one really knows what means the other person has. They are simply projecting. Texags believes that anyone driving a car newer than 2020 must be bad with their finances or in debt, but in reality many of those people they are knocking actually make a lot more than they do. So who actually made the better choice?

Max Power said:

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permabull said:

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agnerd said:

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Lot of people are just financially illiterate. I've been amazed to find out how many people cheated through middle/ high school math classes and don't really understand how compound interest works. I think that's the key. Either you understand how compound interest works and you put it to work for you, or you don't.

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I'd say you have to put it to work for you or get steam rolled by it. When you are in debt compound interest is working for the banks and against you.

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I'd say most people are financially illiterate regardless of income level. The average person in this country doesn't have savings, let alone a retirement account. You'd be shocked at the number of people who don't even put the money into their 401k to get the full match from their employer even though that's additional money without additional work...other than the work of delayed gratification. People don't understand the mortgages they sign, they're just concerned about what they can buy even if it's irresponsible. It's even worse with car loans because they're not regulated like mortgages are. People roll negative equity into new loans every single day. They finance as much as they can for as long as they can. And sadly it's not just a world where their actions only hurt themselves, their poor decisions impact everyone, even those with good credit. Too many people think there's consequence-free money out there when there isn't, and that naivety makes everything more expensive for the entire populace.

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Sad situation and sharks can easily exploit.

Back in 2002 when I bought my first house (a townhouse), the loan lady said she would give me 103% of the selling price as mortgage. I asked her why the 3%, she said it was to buy furniture. She insisted that I accept the "great offer". I said no, (as I got paranoid again) and said I would put down 20% which came to about $40k. She thought that I was absolutely crazy. I had about $2500 in my bank account after that and thank God I did not lose my job as we would be in deep trouble.
In 8 years I managed to aggressively pay it down so I just had about 20k left when we upgraded.

How would uneducated and uninformed people handle this? They'd probably assume the money is free and take on whatever loans they are given and blow it up with fancy purchases.

We can always blame them saying it is their fault they signed but the Govt needs to step in and make things easier for people to understand what they are getting into.

I know one older person who planned on working forever. She loved her job. She got laid off in her 60s and found it to be impossible to find an equivalent job.

She should've had a nice comfortable retirement and instead scraps by on social security.

This taught me that you don't necessarily get to choose when your working days are over.

My view is to spend money on things that provide the most joy to you and minimize those big ticket items that don't. This is different for everyone.

I want to thank everyone on GB for an awesome discussion here today!