How Middle-Class Americans Are Living Hand to Mouth and Why It’s Not All Bad News

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Published May 01, 2014

| FOXBusiness

Thirty-eight million American households, which is roughly one-third of all U.S. families, live hand to mouth, according to a new report. But a majority of them are not technically considered poor -- and in many cases, have made good investments.

New research from the Brookings Institute shows that roughly 25 of the 38 million Americans living paycheck to paycheck have a median income of $41,000, which is in line with the national median income of $43,000.

“Many households are saving,” explains Greg Kaplan, an assistant professor of Economics at Princeton University and co-author of the study. “They are just not saving in liquid forms, and the data shows that’s not necessarily bad because illiquid investments are generally better investments.”

These illiquid assets, which Kaplan says are mostly homes and retirement accounts, make it hard for people to access any of their value. So, especially in a tough labor market, that cash cushion is not readily available for many.

The data also finds that often times for this group, the living-paycheck-to-paycheck situation is not permanent. That distinguishes these Americans from the estimated 12 million considered “poor Americans living hand-to-mouth” with income about half of their counterparts’ at $21,000.

“The study suggests that this is not a label stamped on their head,” says Kaplan. “It’s a phase for the households, happening once or during periods of time.”

This group, coined the “wealthy-hand-to-mouth,” has substantial investments and is generally older, with a peak age of 40. The poor -hand-to-mouth” pool is most frequently younger with little or no assets. On top of living paycheck-to-paycheck, both groups have “large marginal propensities to consume out of small income changes -- a key determinant of the macroeconomic effects of fiscal policy,” the report says.

That means, they respond to stimulus policies much the same way as those with no assets, spending all of their extra disposable income almost immediately.

This huge group of Americans, which Kaplan points out has been around in similar numbers since the 1980s but have not been looked at closely, redefines the image most might have of those living hand-to-mouth.

“Often times, people are impulsive, and so it may be a good thing to put your money [into a house or a retirement account]. There are the unlucky few where it isn’t a good idea, but most times it is….” says Kaplan. “Living paycheck to paycheck isn’t exclusive to the poorer pool of people but it is, in fact, creeping into the middle class.”

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http://www.foxbusiness.com/personal-finance/2014/05/01/how-middle-class-americans-are-living-hand-to-mouth-and-why-its-not-all-bad/