People are Remaining Poor, Despite Earning Consistent Income

By: Mark Smith | Published: Jan 17, 2024

Despite a stable salary, many individuals find themselves facing financial decline. McKinzie Bean, a personal finance and business mentor, and founder of Moms Make Cents, told GoBankingRates, “It might be surprising that even real responsible folks can end up in money trouble without even realizing it’s happening.”

This phenomenon occurs when income remains constant, but external financial pressures increase. This highlights key factors contributing to the situation and the importance of being aware of them. So let’s dive in.

The Impact of Inflation on Purchasing Power

Inflation plays a significant role in eroding the purchasing power of a stable income. Andy Chang, the founder and CEO of The Credit Review, explained to GoBankingRates, “If salaries don’t increase over time, but rents, groceries, and other living costs do, people can find their income doesn’t stretch as far as it once did.”

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People making stable incomes are still hurt when the prices of everyday goods increase. In 2022, Federal Reserve Chair Jerome Powell wrote, “The burdens of high inflation fall heaviest on those who are least able to bear them.”

The Dangers of Lifestyle Creep

“Lifestyle creep” occurs when individuals gradually increase their spending as their income remains constant. NPR also called it “lifestyle inflation” and wrote of the situation, “However you got here, now you have more cash in your bank account, and instead of investing or saving it, you’ve only ballooned the cost of your lifestyle.”

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This gradual increase in lifestyle expenses can lead to significant financial strain, particularly when combined with rising everyday costs and life changes such as having children or adopting expensive hobbies.

The Importance of Effective Budgeting

Effective budgeting is crucial for financial stability, even with a steady income. You might explore different budgeting styles or ways to avoid going over your budget.

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A well-planned budget helps track spending and manage money effectively, preventing financial instability due to unforeseen costs or lifestyle inflation.

The Necessity of an Emergency Fund

An emergency fund is essential for financial security, providing a buffer against unexpected expenses. Without this safety net, individuals with a steady income can find themselves in debt due to unforeseen costs like medical bills or sudden home repairs.

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Experts at Morgan Stanley recommend saving enough to at least cover three months of expenses, perhaps up to six months.

Investing in Personal Growth and Skill Development

McKinzie Bean highlighted the importance of personal growth, telling GoBankingRates, “Those who don’t invest in learning new skills … may pass up chances for career advancement or higher-paying roles.”

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Continuous learning and skill development are crucial in adapting to the job market’s changes and increasing earning potential. Neglecting this aspect can lead to stagnation and missed opportunities.


Avoiding the Debt Cycle

If you’re spending a lot and going over budget, you might fall into what’s called a “debt spiral” or “debt cycle.”

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“The first step getting out of a debt spiral is to stop borrowing money,” Investopedia advises. This is also where it’s important to have a budget and cut back on unnecessary expenses.


Stay Away from Risky Loans

Investopedia also warns against taking on riskier debt to get out of a debt spiral.

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“Certain types of loans, including payday loans, which carry high interest rates, can lead to a high expense that may cause you to borrow more money to pay it off,” their experts say.


The Role of Financial Literacy in Wealth Accumulation

Expert Andy Chang pointed out the consequences of lacking financial literacy, telling GoBankingRates, “By simply storing money in a traditional savings account, people are missing the potential for increased returns through retirement funds or stocks.”

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Financial education is key to making informed investment decisions and taking advantage of growth opportunities to build wealth over time.


Effective Money Management for Long-Term Financial Health

Effective money management involves more than just earning a steady income; it requires strategic planning in spending, saving, and investing.

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This approach ensures that one’s financial resources are utilized efficiently, focusing on debt management, emergency savings, wise investments, and enhancing financial literacy for long-term stability and growth.


Inflation's Continuous Challenge to Fixed Incomes

Ann Martin emphasized the relentless challenge of inflation to those with fixed incomes. “We’ve all gotten a harsh refresher on inflationary dynamics over the past three years or so,” she told GoBankingRates.

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Inflation continuously erodes the value of a fixed salary, making it difficult for individuals to maintain their standard of living without salary adjustments.


Financial Stability Is No Accident

All of this advice illustrates the interplay of various factors affecting financial stability.

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Inflation, lifestyle creep, ineffective budgeting, lack of emergency savings, failure to invest in personal growth, the debt cycle, and insufficient financial literacy are critical areas to address.