The Scarcity Effect

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Unemployment may have leveled off for the time being. Most American workers are still able to find jobs, but an increasing proportion of them are not able to make ends meet at the end of the month because good-paying middle class jobs are being replaced by low income jobs.  About 25% of American workers make $10 an hour or less. Half of all American workers earn $505 or less per week.

One survey found that 77% of Americans are living paycheck to paycheck at least part of time. Seventy seven percent! Knowing that even the average person is having a hard time paying the bills, it’s easy to see how those with the greatest financial burdens are caught in a cycle of debt, and it’s just getting worse.

According to the Urban Institute, the average debt for households earning $20,000 a year or less more than doubled to $26,000 between 2001 and 2010.  That’s debt that outweighs the household’s annual income, and it’s really hard to come back from.

Well how can people avoid this trap?
First, know that you’re not alone. Next, check your pride at the door. It’s time to get some help, and you need to be honest about your financial reality. Finally, see where you can make cutbacks and don’t think you can pay off debt with more debt! One common pitfall is the “payday loan” where you borrow against your paycheck. Payday loan operations typically charge 15 to 30 percent interest every two weeks. Many people who have used them report slipping behind quickly and being forced to pay off the loan. And do you know how they do that? With yet another loan, frequently from another payday operation. It’s a vicious cycle. If you find yourself in a hole, the first thing you need to do is stop digging.

Mellody is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts.  Additionally, she is a regular financial contributor and analyst for CBS News.

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