If you live in the United States and have yearly family income of $150,000 or more, a recent study by Nielsen Global Consumer Insights reveals that there is a 25% chance that you have little or no savings because you consume every last dollar you earn.  This is called living hand-to-mouth or, to put it bluntly, you’re basically broke.  Isn’t that hard to believe?

The average family income in the U.S. is just under $47,000 as of 2014.  It would be reasonable to think those fortunate souls making over $150,000 would not be struggling each month to make ends meet.  Not so, according to Nielsen.  Far from it, in fact.  The same study revealed 33% of households making between $50,000-$100,000 and 50% of households making less than $50,000 are in the same hand-to-mouth situation.

Americans, as a whole, rank as the world’s worst savers.  According to Nielsen, 22% of us across all income levels have no spare cash, followed by 21% in the Middle East and Africa, 20% in Europe and 15% in Latin America.  Families in Asia and the Pacific Region are the best savers with only 8% reporting no extra money on hand.

Humble Beginnings

Most of us endured one or more periods in our lives where just the basic necessities of life consumed every dollar we had.  Maybe we were poor students or paying our dues in low-paying entry-level jobs.  Hopefully, these were temporary phases before moving on to bigger and better things.  During those lean times in my own life I used to think, “If I only got paid more, I’d have money left over at the end of the month that I could save and invest.”  Plenty of others thought like me.  We believed the problem was one of income, or lack thereof, so we dedicated ourselves to earning more.  Surprisingly, achieving that didn’t solve the problem for 25%-50% of us, according to Nielsen.  Why?

Blame Lifestyle Creep

The answer is that it doesn’t matter how much you earn but, rather, how you spend that counts.  High earners are susceptible to lifestyle creep.  As our hard work starts to pay off and we begin earning more money, we slowly rationalize the costs of new luxuries that have little or no lasting value.  We deserve some treats, right?  We earned it.  Upscale homes, luxury vehicles, entertainment, travel, fine dining, expenses for the kids, etc. will drain even a large household budget faster than you would imagine.  Combined with the inconvenient truth that whatever level our standard-of-living rises to becomes our new minimum standard.  Just like that, we’re trapped…seriously trapped…in the hand-to-mouth cycle.

And it gets worse.  Adding to our woes is that we value each additional dollar we earn less and less because it satisfies less urgent desires.  Economists call this the law of diminishing marginal utility and it works like this: by the time I’ve gone out-to-eat for the third or fourth time this week, I’m deriving very little additional satisfaction from it even as I burn through just as much cash as the first time.

The Key is Simple, But Not Easy

There is no alternative to breaking the paycheck-to-paycheck cycle other than to have less going out each month than you have coming in.  In a word:  saving.  Importantly, this applies across all income levels once the basic necessities of daily life are met.

Again, it’s a spending problem, not an income problem.  By focusing on expenses rather than income and being highly, highly selective about lifestyle creep, families can create excess income to save and invest.  As they do, living expenses drop further as consumer borrowing costs decline and eventually go away completely (just compare the total cost of a new car with and without a new car loan!).  Positive returns-on-investment now accrue to the saver and create new wealth and financial security.  And, far from feeling deprived, by concentrating spending on the selective desires you value most highly, you will actually increase the level of happiness and satisfaction you derive from them.  Happier…more satisfied…more secure…beats being broke any day.