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63% of workers say they wouldn't be able to cover a $500 emergency expense. Most people don't have $1,000 in the bank. Most people cannot handle a tire blowout, or they're going to put it on credit. Americans now carry more than $1 trillion in credit card debt.
The official poverty measure in the US today is based on calculations from the mid-1960s. It's also a system that is pervasive in actually creating poverty situations. Poverty leads to more anxiety. It leads to more stress. It leads to more health problems.
37.9 million. That's the number of Americans currently living in poverty, accounting for 11.6% of the total population. That's despite the fact that America ranks first as the richest nation in the world in terms of GDP. The United States is known for having this great abundance, and at the same time, alongside that abundance, there is widespread poverty and economic insecurity. Sometimes you question, you know, we're in the United States of America, how can the citizens be going through such an issue? We always boast that we're a superpower, that we are the richest in the world, and things just don't make sense.
Poverty in the US had been steadily improving over the past decade, from a height of 48.8 million people living in poverty in 2013 to 30.4 million in 2019. That was until the pandemic changed its course. COVID absolutely had a very deep impact on the access to employment and long-term employment for a number of families that were already vulnerable for various reasons. Prior, it was myself and my two older brothers, along with my stepdad, that constantly worked to provide for everyone in the house. But after COVID-19 and the whole lockdown, we were laid off, and ever since then, we have had issues finding a job.
Poverty is expensive. About 11% of the federal budget, or $665 billion, goes to economic security programs. Child poverty alone is estimated to cost the US over $1 trillion, based on the latest research from 2018. There are also really high costs. On an individual level, poverty leads to more anxiety. It leads to more stress. It leads to more health problems, all kinds of things that amplify the effect of poverty. The feelings that you would usually encounter when you're in this position is mostly depression. "Why can't I find a job? Why are we in this situation? You know, we're trying our best, and sometimes it's just falling back down on our face."
So how did poverty become such a big issue in the United States, and why is it so difficult to end it? Income inequality is one of the big reasons why the US suffers from such high rates of poverty. The income for the top 10% was more than 13 times higher than income at the bottom 10%, according to the US Census. "We unfortunately, in the United States, are at the very high end in terms of income inequality. And so what happens is when the distance gets further and further away, the rungs on the ladder get further away, and it's harder for people to climb those rungs out of poverty into the middle and to the upper class."
The pandemic has made inequality worse. The Gini index, which measures the nation's income inequality, rose for the first time in a decade by 1.2% in 2021. The reason the pandemic has made that worse is because when you talk to large organizations, corporations, what they saw was that staff was leaving, but they had a response to that, right? Their response was, "Let's give bonuses. Let's give raises." Many organizations, many small businesses, government, they don't have that luxury. So inflation has kept up with the money that most people in the 1% have made, but it has deepened and widened the gap between those that have money and those that do not.
Research by MIT estimates that the living wage in the United States is $24.16 per hour for a family of four, but the federal minimum wage is set at $7.25 per hour. This means that a typical family of four needs to work more than two full-time minimum wage jobs to earn a living wage, and single-parent families need to work significantly harder. "We worked at a banquet hall, any sort of party, we would set it up, come early, set the tables, dishes, plates, silverware, everything. You name it. We worked for $15 an hour. It was really bad, I would say. We were really overworked, um, 13-hour shifts sometimes. We were really frustrated with where we were, but at the same time, it was like, what do we do if we leave? You know, we were at that stage of like, yeah, we hate this job, but we have to keep it to continue going."
Problems with wages are especially worse for workers of certain races. "If we're looking at the broader population of people who are poor or low-income, meaning one emergency away from being poor, we're talking about approximately 140 million people. Out of the 140 million, well over 70 million people, well over half of that population are people of color."
The US also suffers from a lack of social safety nets that protect Americans from poverty. "If you look at, for example, the amount of cash that people might get if they're low-income, it's very, very minimal. Right now, we receive welfare, and it's roughly around $250 for my household of seven. And it actually has helped us a lot. Sometimes the numbers really don't make sense, because how can a large family just live off a couple hundred dollars? Especially now in this day and age where you go to the grocery store, you spend in a few items $100."
Most countries, for example, European countries, have what's known as a child allowance, where if you have a child, you get a certain amount of monthly income to help raise that child. That's pretty common. But in the United States, we don't have anything like that. And in the United States, we don't have universal benefits, for example, health care or child care.
"It's also a system that many times is pervasive in actually creating poverty situations. So I'll give you an example. If I'm eligible for Medicaid today, and I'm also eligible for cash assistance, and I'm also eligible for SNAP, if I get a job that provides me even a little bit closer out of poverty, I lose all those benefits immediately, which means that I'm incentivized if I need health care for my children and I have a job that's not going to provide it right away to not look for employment that is going to pay me an amount that's going to make me ineligible for certain benefits. Right? So while people are working really hard for upward mobility, the systems that we have in place don't give them the grace to be able to come out of poverty and provide their own agency to actually create the opportunity for upward mobility."
The official poverty measure in the US today is based on calculations from the mid-1960s. It's calculated by comparing pre-tax income against a threshold set at three times the cost of a minimum diet in 1963. A large number of federal programs still rely on this measure to figure out who is eligible for assistance and welfare. The researcher, whose work became the basis of that measure, never intended it to be used in the way that it currently is, both as a widespread measure of poverty, but then as the basis of all of these different social welfare programs and allocations of resources towards those programs.
It doesn't take certain very obvious indicators into consideration. To start, it looks at pre-tax income, which is not what I'm taking home every day. So that doesn't make sense. It also doesn't look at different family compositions, which absolutely impacts how a family may spend money. "If I am the type of family that has both of my parents living with me, I'm going to spend more." It doesn't look at expenses around food or childcare, so in many ways, it's incredibly out of date because it has not kept up with the way life has changed for most Americans.
As a response to these criticisms, the Supplemental Poverty Measure was developed in 2011 as an improvement over the existing measure. It incorporates into the measurement both the cost of basic needs like food, clothing, utilities, but also government transfers and programs. So you could see the effect of government programs in addressing poverty and economic insecurity. It also takes into account geographical differences. So the supplemental poverty threshold is more of a range depending on where you live, your household size, and what your housing status is. So it is more comprehensive in that way. It's an improvement on the official poverty measure.
But some experts argue that even this supplemental poverty measure isn't a perfect method. While it looked to close the gap on certain indicators that the original poverty measure was not taking into consideration, it did not go far enough. "Food is one of those places where we are still not taking into account what food may cause in a state like New York versus a state like Mississippi. So if you have a universal brush for the whole country, you're going to miss a number of people that are either at risk of falling into poverty or are already technically living in poverty, but are not counted by the measure."
The Census Bureau told CNBC that both the official poverty measure and the Supplemental Poverty Measure provide a consistent data of poverty measurement, and that the Bureau continually strives to innovate and improve the design and measurement of their well-being statistics. This difficulty in measuring poverty has also led some experts to argue that poverty isn't as serious of an issue as it's made to believe.
"Poverty in the United States, in the way it's normally understood, is not a big issue at all. It's deliberately miscounted. Okay, so the reality is that we have poverty in the United States because the census ignores the entire welfare state when it goes to count poverty. You count poverty by saying, well, a household has an income, say less than $26,000 a year, but all the welfare benefits are 95% of the welfare benefits are not counted, and they also undercount earnings by about 50%. Therefore, you have a lot of poverty, basically, because most of the resources that these folks have are not counted."
Unless we can get an accurate number of just how prevalent poverty is in the United States, attempting to eradicate it is close to impossible. "When we don't have those numbers, a lot of folks who are making policy decisions are flying blind. Whether I'm a large corporation that is looking to invest in an organization or in a city, or whether I am a public official that is trying to figure out how much SNAP is enough SNAP. If I don't have a baseline, there's no way I'm ever going to be solving the problem."
If COVID has proven anything, poverty is an issue that can be resolved with the right policy. Government assistance led to a significant decline in the Supplemental Poverty Measure, lifting 45.4 million Americans out of poverty during the height of the pandemic. "Policy, I would say, is one of our strongest tools in fully addressing and eradicating poverty. It is where we can define what the problems are, accurately measure what the problems are, and then design and implement the programs we need to address the true extent of poverty."
A really good example that I'll use is that of the elderly. This is the one real success story in the United States, as we've really been able to reduce the poverty rates amongst the elderly as a result of primarily Social Security and Medicare. "So if we didn't have those programs today, poverty rates for the elderly would go from about 10% to 40%. And that shows you the dramatic impact that government programs and policies can have on reducing poverty."
Figuring out a more accurate method of measuring poverty is a vital step in eradicating the issue. "I would begin with changing how we define and measure poverty to include the full extent of economic insecurity." Another way of measuring poverty, and this is a way that European countries and other countries use, is what's known as a relative measure. "And so they say, if you fall below 50% of median income, then we're going to count you in poverty. So if the median income was $70,000 and you fell below $35,000, you'd be counted as being in poverty."
More targeted social programs could also have a significant impact on the impoverished community. Some of those programs may include an expanded child tax credit, the kind of which we saw in 2021 when it was expanded during the pandemic, raising the minimum wage immediately to at least $15 an hour, but then moving towards a living wage and guaranteeing that everybody who wants to work can work as a guaranteed ability and access to a good-paying job.
"I think a really straightforward solution that people have been talking about more recently is the idea of a universal basic income. So here the idea is that if poverty is a lack of income, then a very straightforward way is to transfer some income."
Here's the analogy I would use to get people to shift their way of thinking. And it's the analogy of musical chairs. "Let's say we have ten people playing in eight chairs available. Now, who's going to win and lose at that game? Well, if we focus on the individual level factors, people that were in a bad position when the music stopped and so on. But if we focus on the structure of the game, then two people are going to lose out regardless of the individual attributes. And that's what's going on here in the United States. We're focusing on people aren't working hard enough. They're not doing this. They're not doing that when really the problem is that there aren't enough chairs in the game."
More than half of Americans with an income of $100,000 a year or higher say they're living paycheck to paycheck. This may be the result of a sneaky behavioral phenomenon called lifestyle creep. Lifestyle creep is the common pattern of making a little more money and starting to spend a little bit more money. It happens almost automatically. "I think people hold these benchmarks in their mind. If I reach this position or I get this promotion or I make it to this age, then I can live this life, or then I deserve to have these things, and then they kind of go a little crazy or go a little wild on it, and then it becomes like a trade-off, like they only can enjoy their present happiness and they're not able to save or plan for the future."
"There's nothing wrong with wanting nice things. The mental, emotional reason why we want to acquire more is generally rooted in this need for like, your perceived value. Like we live in a world where like the nicer car you drive, the higher your perceived value is." Six out of every ten people surveyed said that paying for everyday expenses negatively impacted their mental health. "It does take a lot of joy from just life and always being in this scarcity mindset, when there isn't necessarily a scarcity to fear."
Here's why Americans feel like they're constantly struggling to keep their paycheck, even when they start making more money. "So you get a new job and you have a little bit of a pay bump. Suddenly there's a little more room in your budget. You know, maybe you do some small upgrades, like you eat out rather than cook at home, or buy those Taylor Swift tickets or upgrade your music subscriptions. Anything like that is an example of lifestyle creep. It's just these little upgrades that are very hard to undo financially or even psychologically once you've made them."
"A lot of people have this scarcity mindset around money, and they spend so much of their lives saving, saving, saving. And so there can be this point where if you're constantly saving your whole life, and then you finally reach this marker of financial success, or you finally reach this big paycheck number, you feel like you finally deserve to enjoy your life. The idea that people save and they just hit a point where they feel like they deserve it. I fully disagree with that."
"Most people don't have $1,000 in the bank, like most people cannot handle a tire blowout, or they're going to put it on credit. There's no financial literacy, no financial education that happens. The average person does not think about lifestyle inflation at all. I think it's something that's not even on the average person's radar."
Coming out of the pandemic, there was a strong desire to go out and splurge on experiences, maybe take a trip. This is often referred to as revenge spending or revenge travel. Research shows that young adults are particularly susceptible to this. "They feel discouraged by higher prices and, you know, making ends meet. So they might feel like they'll never have enough money to retire anyway. They might as well enjoy themselves now, unlike perhaps their parents were."
Young adults need to be more responsible for their retirement because a lot of the safety nets that maybe their parents had, like a pension, no longer exist or are extremely rare, so they need to contribute to their own 401K if they want to shore up their financial security. "There's something about spending a little more than we should that can feel like rebellious or bad, and it often can be a reaction to our family culture around money or parentified or internalized rules around what we can give ourselves. And some people might overspend as like revenge against these rules, and some might look at someone who's overspending and think and kind of label them as all bad or all good. And there can be a lot of guilt and anxiety around the consequences. Spending is a way for us to meet one need, one another isn't met."
"I was 19 years old when I entered my first corporate job. I was still figuring out how to adult as well as how to be in this, you know, corporate world, make an income, which for sure led to overspending. You know, I was sad, so I would shop. I was getting serotonin through shopping. Then that led to me accumulating over $30,000 of credit card debt, and I had to figure out how the heck I was going to pay that off. When your spending is dictated by emotions or depriving yourself or holding back your needs, that's when it becomes problematic."
"I generally like to think of lifestyle inflation in sort of two buckets. You have like your general idea of what lifestyle inflation is, which is the buying fancy cars, the buying nice things along those lines. And then there is lifestyle creep that's more like regular everyday things that if you're living paycheck to paycheck, you're going without, like going to the dentist, getting oil changes on your car. Right? There was a time in my life when oil change was just like, not even a priority. Like I'm trying to keep tires on my car. I'm trying to keep it running. I'm trying to keep the registration paid. I'm not concerned about an oil change. Right."
More than 60% of Americans live paycheck to paycheck as of September 2023. That, along with inflation, can have serious financial consequences. Many Americans also don't have emergency savings to fall back on. 63% of workers say they wouldn't be able to cover a $500 emergency expense.
"You know, there's that saying being poor is really expensive, because then when it is time to get basic maintenance on your car, it ends up being way more expensive than you were planning on it being because you haven't done basic maintenance. And that can go well beyond car trouble." 46% of Americans said they have a balance on their credit card because of an emergency expense, according to a Creditcards.com survey, 10% coming from car problems, 11% to cover unexpected medical bills, and 10% for home repairs.
Because of inflation and higher prices nearly across the board, people have been having a harder time making ends meet, and often that means turning to credit cards to fill in the gap between what you need to buy and what you can actually afford. Credit card rates are over 20%. That's the highest interest that you'll likely find anywhere unless you're getting a payday loan. Credit card debt can really spiral out of control, and pretty quickly.
"The solution to get what you need when you're in a position when you don't have it, it really is to just make more money. It sounds like a simple solution, but it also sounds like a condescending one, right? You tell somebody who like, is doing the best that they can that like they need to make more money. The solution to make more money isn't really realistic."
"The experts that I talked to said, it's okay to treat yourself as long as you've built in a buffer in case something comes up and you want to be able to find that balance between enjoying your life and your emotional well-being and your financial well-being." Gabriela Flores describes herself as a recovering super saver. "I would describe a super saver as someone who maybe is now in a position where they do have some sort of income, some sort of stability, but it's a certain mindset that keeps you in scarcity mode and afraid to spend on things that you may need or want, and kind of affect your lifestyle in that way."
"My way of saving it was to hoard it. And the tough part is that saving for the sake of saving, it's not very reinforcing, but it can kind of be addictive. And there's momentum in that. I wouldn't advise going to that extreme. It does take a lot of, I don't know, a lot of joy from just life and always being in this scarcity mindset when there isn't necessarily a scarcity to fear."
"After working with a wealth coach, I continued to save because I was still very kind of would put me at ease in that scarcity mindset. Like I felt at ease having kind of my savings. I continued to save money, but in a more intentional way, with the intention being of spending it. When you're in scarcity, you're feeling this anxiety. My first thing that I like to tell individuals is forgive yourself for what you've done in survival mode. I think I like to divide it between, you know, what's essential, what's, you know, an actual bill type of expense versus a lifestyle. What's a choice that you, you know, take on to, to spend money, for example, a choice to go out drinking and having fun. And there's also but there's also not the choice you have to make that car payment. You also have to put gas in that car for it to go, right? So there's things that you can't avoid and there's things that you have a choice to do and you can adjust."
"Value-based spending is what I teach. And it's where you sit down and you really evaluate one, where am I spending my money right now, and am I being reactive, or am I being proactive in that? Am I spending my money in places that really have value for me, or am I spending my money in places that I think I should be spending my money because of outside influences? And once you have an idea of where your money is going right now and looking at am I aligned with this? Is this something that I actually value."
"The goal here is to find balance. It's about finding ways to spend in the moment, and also how you want to spend your money in the future. So it's about enjoying your life, but not being so focused in a future that hasn't come yet or too much focus on the present. The idea is having your cake and eating it too. You can have bites of your cake right now and then save some cake for later."
The US economy has been on recession watch for months now, and so far the all-important American consumer has been holding strong, keeping those recession forecasts from becoming true. Consumer is still spending. Consumer is in better shape. If they have money, they're going to spend it. Consumers continuing to be resilient. The consumer health has been resilient so far this year. Consumer resilience is about to be tested.
Americans now carry more than $1 trillion in credit card debt going into the holiday shopping season. The Federal Reserve's rate hikes have caused average interest rates for credit cards to spike to more than 22%. Rates on retail credit cards are even higher, nearing 29% on average. Despite this, the holiday season shows no signs of a slowdown as each shopper is prepared to spend almost $900 on average this year, according to an NRF survey.
"The U.S. consumer is walking towards a cliff, basically. The state of the consumer will be in focus in the post-holiday season, as economists will want to know, can American consumers handle racking up a record amount of credit card debt, and if it will lead into more delinquencies." This is the first time credit card debt has topped $1 trillion in America. That amount includes both revolving balances and balances paid off at the end of the billing cycle.
Consumers are increasingly reliant on credit cards to finance purchases of everyday goods and services, and that's because they're just getting a lot more expensive. At the same time, their wages are not increasing at the same pace as inflation, and that makes it more difficult because as the credit card balance increases, it can be more challenging for consumers to pay down that debt. The excess savings that Americans lined their pockets with during the COVID-19 pandemic is largely now spent. High inflation and interest rates have made everything more expensive. Normal costs like groceries, gas, and housing are all rising. Add in the resumption of student loan repayments, and it's creating the perfect rising debt storm.
Americans are skipping out on some of their credit card payments because household budgets are squeezed due to higher borrowing costs. Another factor for the rising debt is the increase of credit card users. More than 70 million new accounts have been opened since 2019. That year, 65% of Americans owned a credit card, and after contraction and issuance due to the pandemic, the amount of Americans owning a credit card rose to 69% in 2023.
"Credit cards can be like power tools. They could be really useful, or they could be dangerous. It's all about how you use them." Typically, after the holiday season, credit card debt levels drop as consumers pay down their shopping balances. But at the start of 2023, it remained unchanged, and now shoppers are prepared to spend even more than 2022.
"Holiday shoppers do plan to spend more, according to a survey and the forecasts done by the National Retail Federation. They found that people plan to spend about $40 more than they did last year, and that could be in part because of higher prices in some categories. There is still this deal-seeking mentality for items, and so that may mean that people are going to look for whatever is on sale, along with seeking newness."
Americans planning to flood the mall with their retail credit cards may be shocked when the bill comes, because those cards are carrying a higher interest rate than years prior. In fact, some are starting to rise to rates that only subprime borrowers see rates exceeding 33%. Some retailers have already noticed that credit card delinquencies have ticked up, and that may mean that people are struggling to make payments and could again be a warning sign. Big box retailers like Macy's and Nordstrom have already flagged a slowdown of repayments on their credit cards over the summer, showcasing a potential risk to retail revenue this season.
The average consumer has around a $6,000 credit card balance, $400-$600 monthly student loan payment, high rent, and car loan payments. "Americans may wonder if it's even possible to keep their heads afloat." This tip for credit card debt payoff actually is to get a 0% balance transfer card, so you move your existing high-cost debt to this new card with a 0% promotional rate.
Credit card balances saw the largest increase of all debt types this year, $45 billion. And compared to other debt types, credit cards typically hold the highest interest rates. "Any extra money should probably go to the credit card, just because that's likely to be your highest cost debt by a wide margin."
A boon for consumers may come from the Congress Capping Credit Card Interest Rates Act. If passed, the bill would cap APR for credit cards at 18%, prevent credit card companies from imposing new fees to evade the cap, and impose penalties on credit card companies that violate the cap. But all eyes are still on the Fed. We're not really sure where the Federal Reserve is going to be taking interest rates next. If they continue to hike rates, it could be more difficult for borrowers to pay down the debt. If they reduce interest rates, however, it will take some pressure off consumers, and they might be able to start making more consistent payments and reduce those delinquency rates.