Why Even Full-Time Workers Struggle With Expenses

A new book based on extensive research of U.S. households says income instability is to blame.

Unemployment is low, inflation is historically low and even wages are perking up, leading many observers to believe the U.S. economy is humming along nicely. So why do many Americans say they are struggling?

A new book born of meticulous, years-long research offers a fresh insight into this burning question. Month-to-month swings in income, even for those with full-time jobs, are often the cause of Americans” financial anxiety, claim the authors of “The Financial Diaries: How Americans Cope in a World of Uncertainty.”

For a stunning number of American households, both income and expenses swing 25% or more in either direction on a regular basis, leaving many families scrambling on a month-to-month basis, even if things don’t look so bad annually, the authors argue in their book and a Harvard Business Reviews essay.

Economic data tends to examine broad movements; even at its most micro, it tends to identify years-long trends. Researchers Jonathan Morduch and Rachel Schneider had a sense government statistics were missing things, so they went nano. They spent 12 months getting 235 families to track every single dollar going in and out — 300,000 cash flow events in all. The product of their painstaking research offers perhaps the clearest view yet of why even middle-class Americans find themselves living with deep economic anxiety. The book even offers up a new term — “precarity,” or precarious economic volatility — to describe the plight of everyday Americans.

One of the more bold claims made in the book: Despite all the talk about income inequality, the authors say income instability has risen even faster and is the more immediate problem.

What’s Income Instability? 

Many readers are familiar with the idea that unexpected expenses — like a health scare or major auto repair bill — can derail many households. But the book establishes another reality that might be new to many: income volatility, even among those with full-time jobs.

The book’s opening anecdote cites a research subject who works as a truck mechanic in Ohio. While he works full time, his pay relies largely on commissions and can vary from $1,800 to $3,400 each month. In bad weather, trucks break down more often. That means in the spring and fall months, mortgage payments aren’t made, and the electricity bill goes unpaid. Later, for a fee, the family catches up. (You can see how any missed loan payments may be affecting your credit scores by viewing your free credit report summary on Credit.com.)

This same problem is repeated again and again among the families studied. Morduch and Schneider found that the term “average income” is a bit of a farce, as typical families lived through five months each year with income that swings either 25% above or below “average.”

“This is creating a lot of anxiety and uncertainty that is impossible to see in the usual data,” Morduch said in an interview. About five months out of each year, incomes “weren’t even close” to average.

“Often we see the (financial) problems as a discipline problem, a failure of personal responsibility. What we’re trying to say is there’s something else going on,” he said. “The underlying conditions are really hard. It probably isn’t just about self-discipline.”

Income swings are to be expected among families suffering job loss, the self-employed or those who rely on tips, like waiters. But the researchers found a stunning rate of income volatility even among those with traditional-sounding full-time jobs.

“This was the single biggest surprise (in the research),” Morduch said. “There’s insecurity that’s because you are going to lose your job, but that’s not what’s driving anxiety for these folks … What we see is that when paychecks bounce from month to month, people can be making good financial choices but are still struggling.”

As a result, even earners who are safely in the middle class spent a month or two living as poor or “near poor,” the book says. The problem for many is better described as a lack of liquidity — getting enough cash to pay the mortgage this month — than as insolvency, or a hopeless difference between income and expenses.

“Not balancing on a high wire, driving on a rocky road,” the book says. “(There’s a) distinction between not having money at the right time vs. never having the money.”

While economists might just be becoming aware of this month-to-month struggle, the financial industry has known about it for some time. That’s one reason there are more payday lending storefronts in America than McDonald’s restaurants. (You can find tips for escaping payday loan debt here.)

Trouble Saving for a Rainy Day

The volatility problem is closely related to Americans’ lack of emergency savings. Study after study shows a large percentage of Americans don’t have the recommended three months of living expenses stored in short-term savings. Some studies show even more dire data. A stunning 46% of Americans told the Federal Reserve in 2015 they could not cover an emergency $400 expense without selling something or borrowing the money. Income and expense volatility, combined with no savings, is a perilous combination.

“Households don’t have a big cushion. Into this mix is the reality that levels of income have not risen – the bottom 50% has seen no income growth since 1980 — then you are really squeezed,” said Morduch. As a result, even in good months, earners don’t have any extra left over to build a rainy-day fund – economists say their budgets have no “slack.”

“There is a knock-on effect of diminished slack so when the budget gets hit by a car repair or the house needs a new roof, it’s just that much harder,” Murdoch said.

How did this income volatility come to pass? The authors blame what they call “the Great Job Shift.” Employers are increasingly sharing risk with their workers. That means cutting back hours, often on the spot, when times are slow. Or basing a large portion of pay on commission, as in the case of the truck mechanic. In other cases, workers rely on tipping to top-up wages that otherwise aren’t livable. In one of the book’s more frustrating scenes, as casino blackjack dealer in Mississippi describes how her income relies on events as whimsical as the nearby college football team schedule.

The subjects in the book are anonymized. Their names changes and a few other personally identifiable data points have been obscured, but otherwise, their financial diaries are disturbingly real.

How Do We Fix it? 

When asked for policy recommendations, Morduch leaps to the defense of the Consumer Financial Protection Bureau, which he says is working hard to regulate many of the short-term lending products that have emerged to services workers with volatile incomes. He says there’s also been constructive conversations with large firms about making hourly wage worker schedules more predictable, and moving away from so-called on-call workers. The “Schedules That Work Act” that would have promised some workers two-weeks scheduling notices was considered but tabled by Congress under President Barack Obama.

Other changes would help, too. Many social benefits programs are cumbersome to apply for and don’t offer much help for families who are only occasionally “near poor,” and might need help one or two months per year.

Changes that could encourage saving for short-term events would help, too. Tax-advantaged products like 401K accounts help families plan for decades in the future, but families living on the margins are afraid to use them for emergency savings because of the severe early withdrawal penalties. (You can learn more about withdrawing from your 401K here.) More flexible rules would encourage greater use of retirement accounts, Morduch believes.

“A lot of Americans wisely don’t want to lock up their money,” he said. “There isn’t enough attention paid to shorter-term policies.”

In a larger sense, Americans should probably change the way they think about income and spending, Morduch said, and many could learn from research subjects described in the book.

“The families we got to know, they think a lot about liquidity. They have a lot to tell other Americans. Mainly, prepare for a life of ups and downs,” he said.

If you’re looking for ways to keep your finances in check, we’ve got a full 50 ways you can curb and stay out of debt here

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Employees and Businesses Brace Themselves For New Federal Overtime Rules on Dec. 1

Brandon Checketts, founder of RoundSphere, a tech incubator, stands with two of his employees in his Athens, Ga., offices on Nov. 15, 2016. Caroline Powell (right) is the director of customer service, and Tyler Henderson (left) is in business development. Checketts gave a handful of employees pay raises ahead of new federal overtime rules, which begin Dec. 1. Photo Credit: Shannon Adams

Updated Nov. 23, 2016

In a major blow to one of the last major regulations proposed by the Obama administration, a Texas federal judge has temporarily blocked the implementation of a rule that would have made 4.2 million workers eligible to receive time-and-a-half pay for overtime work.

The judge ruled on Tuesday in favor of a joint lawsuit filed by 21 states challenging the rule, which was set to take effect Dec. 1, arguing that the rule was imposed “without statutory authority”.

The rule would have required companies to pay overtime wages to non-exempt employees who earn less than $47,476 per year — double the current threshold of $23,660. 

The fate of the overtime laws remains uncertain. The judge’s injunction precedes a final ruling on the law, but it suggests he will rule against it. President-Elect Donald Trump has been vociferously against heightened federal regulations and has vowed to impose new limits on how many new regulations can be implemented — for each regulation approved, at least two must be removed, he’s proposed.


Christa Hoskins received a whopping $10,000 salary increase for her three-year work anniversary, partially due to new federal overtime rules that take effect Dec. 1.

The 25-year-old’s salary as a graphic designer at Spiro & Associates, a marketing, advertising, and public relations firm in Fort Myers, Fla., now tops $47,476. The raise was based on merit but also came as Hoskins’ employers, like many others across the country, prepare to comply with new federal overtime rules.

Starting Dec. 1, companies must beginning paying overtime wages (1.5 times their hourly rate) to non-exempt employees who earn less than $47,476 per year — double the current threshold of $23,660. The new overtime protections could impact 4.2 million, or 35% of U.S. workers, according to the U.S. Department of Labor.

Hoskins, for one, isn’t complaining.

“This extra money going into my paycheck is very helpful, and will benefit those days where I work longer hours,” she says. “It would definitely help bring in more income as well as make up for the longer workdays.”

Other workers may not be as lucky. The new law has caused employers to pore over their staffs and budgets as they prepare to tackle the requirement to pay overtime to employees who previously didn’t require it. The strategies they are using to comply with the new rules vary. Some have chosen to give salaried workers pay raises, like Hoskins. Other employers have chosen to reduce worker hours and hire more part-time staff to avoid paying overtime.

Here are 5 ways the new rules could affect your paycheck, or your business’s bottom line.

1. Small businesses may pass higher labor costs on to their customers.

The new overtime rules have sent some small business owners into a panic over rising labor costs. Many small businesses are still reeling from the implementation of the small business mandate under the Affordable Care Act. The mandate, which went into effect in 2015, stipulated that certain employers with more than 50 full-time equivalent employees (working 30 or more hours a week) provide affordable health care coverage or face a penalty.

“I’ve heard a lot of doom and gloom speculation as to what this is going to do,” says Suzanne Boy, an employment law attorney with Henderson, Franklin, Starnes & Holt, in Fort Myers. “There is a frustration among a good number of small business owners as to how difficult it is to operate a small business these days with all of the regulation and everything they have to follow.”

For some businesses, the additional cost of salary bumps will be passed on to clients who use their services.

Christopher T. Spiro, founder and CEO of Spiro & Associates, says he is concerned the federal overtime rules and other costs, such as increased health insurance premiums, could “crush” a small business like his.

Spiro’s staff works long nights and weekends for some client projects and events, often working overtime. With the new overtime rules, a $30-an-hour employee could easily become a $45-an-hour employee during the week or a $60-an-hour employee on the weekend. He expects to have to pass the additional costs of labor onto his clients by charging more for their services, and he’s concerned clients may look elsewhere.

“So they’re going to be more inclined to go to an event company or a sole proprietor. So now this is causing me to lose business,” Spiro says.

2. Some salaried workers could see pay raises

Increasing salaries is one common way employers are navigating the new regulations. The new rules are more likely to impact salaried employees because they don’t work on an hourly basis. Offering raises is a way to avoid tracking the overtime hours required by the new law and keeps budgets manageable.

A little more than a year after Caroline Powell joined the customer service department at Athens, Ga.-based startup Seller Labs, she was surprised with a new title — director of customer service — and a 10% pay raise.

Brandon Checketts, founder of RoundSphere, the tech incubator that owns Seller Labs, acknowledged the overtime law’s role in his decision to give some workers raises but says it wasn’t the sole factor considered. Powell was one of a handful of workers who received raises of at least 7%, he said. Some increases took effect months before the Dec. 1 overtime changes.

For Checketts, the decision to opt for pay raises was intended to maintain company culture.

“All of our [salaried staff] don’t really keep track of time at all. So just to maintain that culture, we kind of pushed more people just above the threshold so that we don’t have to start [tracking hours for them],” Checketts says.

Christa Hoskins, 25, a graphic designer at a Fort Meyers, Fla. marketing firm, received a $10,000 pay raise ahead of the new federal overtime regulations.

Pay raises have the dual effect of satisfying new overtime regulations and also boosting employee morale. “I felt super valued, which has been great,” Powell says.

Although Hoskins was thrilled to have a salary increase, she says her steadily increasing health care premiums put a damper the bump in pay.

“For me, if my health insurance didn’t go up so high, I would say, ‘Oh yeah, it’s perfectly fine, it’s in my raise now,’” she says. “[But] because [my premium’s] taking out such a huge chunk, that overtime would have been nice.”

3. Companies may begin hiring more part-time workers

In order to avoid pushing too many workers into overtime, some companies are hiring more part-timers to pick up the slack.

“Over the last year, we’ve basically hired people as hourly employees where we probably would have hired them in more of a [salaried] role previously,” says Checketts. “We’ve hired some people specifically as hourly, knowing [the new regulation] was coming.”

David J. Frohnen, president of Silver State Analytical Laboratories, a full-service analytical chemistry testing laboratory based in Las Vegas, Nev., says his company tends to hire recent four-year college graduates as non-exempt salaried employees.

He’s now considering hiring larger numbers of two-year college grads in full-time hourly technician roles. While they too would be subject to overtime pay, the larger number of hourly technicians could help reduce the overall amount of overtime hours that are accrued.

“We’re going to be spending time counting hours instead of helping our clients,” he says. “Culturally, that’s a real big shift for us.”

Spiro says his marketing firm also may use third-party vendors to do work that his staffers typically would do, to avoid costly overtime.

4. Salaried workers may start to clock in and out

Brandon Checketts, the owner of Roundsphere tech incubator, works in his office in Athens, Georgia, on Nov. 15, 2016. Checketts has given some employees raises ahead of new federal overtime laws. Credit: Kelsey E. Green

To comply with the new overtime rules, some companies will now require salaried employees that fall below the exempt threshold to clock in and clock out in order to track overtime hours. This can be a tedious process and some business owners, like Checketts, have bristled at the idea of disrupting their company’s flexible work culture.

RoundSphere’s 55 employees work in the company’s Athens, Ga., office and also remotely. While RoundSphere has moved some non-exempt salaried employees into exempt status with the increase in pay, the company still has hourly workers who will fall under overtime rules.

“We don’t pay a lot of attention to hours. So obviously with the change, we do have to pay attention to hours,” Checketts says.

5. Companies may test out the ‘fluctuating workweek’

The “fluctuating workweek” is a strategy that employers don’t typically use often. The new rules could change that, Boy says.

Here’s how it works: An employer and employee agree up front that the employee will be paid a certain salary for a certain amount of hours. That will cover all the hours that they work, which can be 30 hours, 70 hours, or any number.

Then for any hours over 40, the employer is only obligated to pay a half-time rate, as opposed to a time-and-a-half rate, because all of the initial hours have been covered by the salary.

The benefit to the employer is that they have to pay less, Boy says, if an employee works above the agreed-upon hours. The benefit to the employee is that they’re still on a salary, instead of being converted to hourly employees, and they still get a bump (albeit a smaller one) in pay if they work extra hours.

The future of the overtime law

The National Federation of Independent Business, a small-business association, says the result of the new regulation could be less flexibility as well as smaller paychecks, if employers limit employee hours.

“We’re changing the culture of our company from a team atmosphere and get the job done for our clients and sharing the success of our company to one of put your time in … get your dollars,” says Frohnen, who is also a member of the National Federation of Independent Business.

He is supporting a bill proposed in Congress and following the status of a 23-state lawsuit led by Nevada’s attorney general, both of which could delay or roll back the rules. The Protecting Workplace Advancement and Opportunity Act proposes to nullify the new overtime rules and prohibit automatic increases to the salary threshold.

The bill, which has a version going through Senate and House committees, also would require the Labor Department to perform an economic analysis on the impact of mandatory overtime to small businesses, public employers, and nonprofit organizations.

“I still have a little bit of hope,” Frohnen says.

The post Employees and Businesses Brace Themselves For New Federal Overtime Rules on Dec. 1 appeared first on MagnifyMoney.

The Places With the Highest Paychecks


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How Getting a Promotion Can Backfire


Earning a promotion can be (and usually is) a huge undertaking, and is a step forward that most people only make a handful of times during their career. In some cases, it means you actually have to switch jobs or work for a new company in order to earn another title. Or, you may just have to play the part of the corporate ‘yes man’ for enough years to progress toward an advanced position. No matter how you do it, getting a promotion is usually a big deal.

But a big deal doesn’t always equal a good deal.

Promotions are typically sought-after feats because they come with additional responsibilities. When we’re given more responsibilities, it usually means we’re earning more money. Increasing your earning power and stepping into a new role that offers a whole new range of possibilities and opportunities (perhaps you’ll finally get to work on a project you’ve been putting off, for example) are the chief reasons that most workers make the push for advancement.

So, how can that be a bad thing? Everyone wants to make more money, after all. But the responsibility part? Well, we may not want that. But if the money is good enough, most workers are happy to take it on. Where things get squirrely, and when a promotion can ultimately end up being a net negative, is where those two things don’t exactly line up.

A Promotion & Work-Life Balance

When we work, we are essentially selling our labor — or our time — to the highest bidder. With that said, the question becomes this: How much is your time worth? If you at least have an idea, then you’re on the right track.

Now, when we earn a promotion and have to start shouldering new responsibilities, we need to recalculate what our time is worth. The real trick here is to figure out what, exactly, is expected of you in your new role, and how that impacts your life. If you’re a salaried manager now, for instance, whereas before you were an hourly employee, you may actually end up making less money per hour than you did before. It completely depends on your individual circumstances.

Perhaps you actively despise managing people and making tough decisions. Were you happier in a production role, where you were performing the tasks and completing projects that you’re now only seeing on a spreadsheet from a manager’s perspective? That’s going to differ from individual to individual, but the key question to ask yourself is whether or not you’re happier post-promotion than you were before.

The pay raise that came along with the promotion and the additional elements of respect and clout that came with your new title likely helped. But in each individual circumstance, you’ll need to ask yourself whether or not you’re actually in a better place.

For some people, they may have been better off earning less money, but being happier in their non-managerial role.

Time & Money

As mentioned, time is money. You need to realize that in managerial roles — or at least positions higher up the chain — responsibilities compound, and you’re more likely to spend more hours on the job. Your time can be seen as more valuable in these positions, but the stakes are also higher. People (be it shareholders, board members, etc.) expect you to get things done, and not just shrug off your responsibilities and let your boss take the heat.

Again, for a lot of people, the pay raise that comes along with a promotion in these instances simply isn’t worth the additional stress that comes with the new responsibilities. That’s what you need to ask yourself before taking a promotion: How is this going to impact my health and happiness, not merely my paycheck?

If you work at a restaurant, to use another example, and earn $10 per hour, would you be willing to accept a role as an assistant manager or manager, for a $2 per hour pay raise (or something similar), but with much greater responsibilities and longer hours? If not, in that case, you may be better off staying in your current role, and keeping your sanity in check. Especially if you plan on using the extra time away from work to go to school or explore other career areas.

Before gunning for or accepting a promotion, take some time to consider the trade-offs. Longer hours, more responsibility, as well as more stress and money versus less stress and a lighter paycheck — depending on your personal preference, one may be a better fit for you. That doesn’t mean you shouldn’t push for higher pay or a better deal with your employer (or a different employer), but giving the endgame some consideration before jumping into a new role should be the first thing you do when charting your career trajectory.

[Editor’s note: If you get a promotion that comes with a bump in pay, it’s good to remember that doesn’t mean you should necessarily start spending more. You may want to consider using that added income to help pay off any credit card debt you may have or to help you build an emergency fund. You can monitor how your promotion is affecting your financial goals, like building good credit, by using this free tool on Credit.com.]

This article originally appeared on The Cheat Sheet.  

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Does Taking a Pay Cut Hurt My Credit?


Income isn’t generally reported to credit bureaus, but that doesn’t mean a shrinking paycheck can’t have an affect on your good credit. If you start missing debt obligations as a result of a less money coming in, you’re credit score can suffer.

And what about changes to your credit limit? Could a change in income from retirement or taking a lower salary impact how much credit card issuers are willing to extend to you?

“Every creditor has debt criteria for limits and terms, but I’ve never had a discussion with anyone who experienced a credit limit decrease because of a salary change,” Bruce McClary, vice president of communications with nonprofit National Foundation for Credit Counseling, said.

Likewise, Thomas Nitzsche, a spokesman for Clearpoint, another counseling service, said he’s never run into that situation.

“While it would certainly make sense for creditors to lower a limit based on income, I don’t have any firsthand experience of clients reporting this,” he said.  “We do see lowered limits when a client’s score begins to slip and during the recession we saw creditors lower limits and increase minimum payments across the board, but I cannot say that we have seen the same happen when clients self-disclose a lower income.”

Several credit card issuers did not immediately respond to questions about lowering credit limits because of salary decreases, but most issuers retain the right to lower your credit limit at any time. For example, the member agreement for the Chase Freedom credit card (you can find a full review here) states “We may cancel, change or restrict your credit availability at any time.”

Remember, a lower credit limit could hurt your credit score, since credit utilization (the amount of debt you owe versus your total available credit) is a major factor among credit scoring models. You might not be able to avoid a reduction in credit card credit limits, related to a pay cut or otherwise, but, fortunately, there are plenty of things you can do to ensure your credit score doesn’t take a hit.

Here are a few tips for managing your credit with a lower income.

1. Live Within Your Means

Whether you’re making six figures or minimum wage, living within your means is key to keeping your credit score in good shape. If you find yourself making less, adjusting your budget can be key to doing that so you avoid missing payments or defaulting on debt.

It’s a good idea to review your monthly expenditures and figure out where your money is going. If you aren’t already doing so, you can start tracking your spending, then you’ll know what to cut. It’s also a great time to start making coffee at home, cook homemade meals, and cut non-essential monthly costs like subscriptions.

2. Create a Budget, or Adjust the One You Have

Adjusting your standard of living comes with a lot of challenges, but reducing your spending is much easier than dealing with a pile of debt, collections accounts and a damaged credit score.

Creating or altering your monthly budget can help, and it’s easy to get started once you think about your financial goals and re-evaluate your needs.

3. Keep Current on Monthly Bills

For the monthly bills you can’t cut out — like loans, credit cards and utility bills — it’s important to keep current on payments so you can stave off any credit dings. Keeping your credit utilization below 30%, and optimally 10%, is also important.

4. Hold Off on Applying for New Credit

While your income isn’t typically part of your credit report or score, it is most often included in a credit application. Some loan products require a certain debt-to-income ratio, and credit card issuers will want to know how much you make before issuing you a credit limit. Remember that hard inquiries can result in a drop in your credit score, so it’s important to know where your credit stands so you don’t apply for cards or other credit you’re unlikely to qualify for. You can check your credit scores for free every month on Credit.com to see where you stand.

If you’re already saddled with debt and are dealing with a drop in income on top of that, you could consider a balance-transfer credit card or debt consolidation loan to help ease your monthly obligations.

At publishing time, the Chase Freedom credit card is offered through Credit.com product pages, and Credit.com is compensated if our users apply and ultimately sign up for this card. However, this relationship does not result in any preferential editorial treatment.

Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.

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