Some 46.5 million Americans—15 percent of the population—live below the poverty line. But the number of Americans living paycheck-to-paycheck is likely double that. According to a new report from the Brookings Institution, when economists look only at net worth they miss a whole swath of people who end the month with little in their bank accounts—a group that Brookings call the “wealthy hand-to-mouth.” Though these families have incomes well above the poverty line, they still experience the same month-to-month crunch.
“These are households who hold sizable amounts of wealth in illiquid assets (such as housing or retirement accounts), but very little or no liquid wealth, and therefore consume all of their disposable income every period," says the report.
Take, as an example, a family that's paying down a mortgage and saving for retirement and in which everyone needs a car to get to work and has other credit card or student debt to repay. This family's income and net worth might be unarguably middle class, but, after all these locked-in payments are made, there's little money left over each month.
According to the report, some 25 to 40 percent of U.S. households live paycheck-to-paycheck. Brookings counts two-thirds of that group as the “wealthy hand-to-mouth.” Compared to poor families that live hand-to-mouth, the working members of these families are often older and have $50,000, on average, squirreled away in illiquid assets. Wealthy hand-to-mouth families aren't unique to America: they can be found in Canada, Australia, Germany, Italy, France, Spain, and the U.K., too.
There's a big difference, though, says the Washington Post, between people living paycheck-to-paycheck at different income levels: “Perhaps the most striking difference is that while the poor hand-to-mouth tend to stay that way for long periods of time, wealthy-hand-to-mouth status is transient, lasting an average of only 2½ years.”
The report also suggests that some families choose this lifestyle for a reason. The model the Brookings researchers created shows that "under certain parameter configurations," having little liquid wealth is the best option—otherwise, those famillies would lose out on the high return that investing in illiquid assets, like housing, can bring.
In other words, some families may choose to live lean for a while, pumping their money into long-term savings and other illiquid assets, anticipating that these will pay out more in the long run. The only problem is that, as we saw in 2008, sometimes the investments that seem like sure, safe bets simply aren't.