Why the Economy Sounds Good to Some and Broke to Everyone – and What You Can Do About It

If you’ve walked into a restaurant lately and waited 45 minutes for a table, or tried to book a flight and saw the seats sold out, you may be scratching your head.

We keep hearing that people are struggling. Credit card debt is mounting. Savings are down. However, everywhere you look, people seem to be spending money like it’s going out of style.

So, what happened?

The answer is no everyone you’re good. It’s that one group of people is doing really well, while everyone else is quietly slacking off.

New data has just confirmed what many of us have long suspected: we live in a “K-shaped” economy. One arm of “K” goes up, the other goes down. The problem is that the people on the way up spend enough money to make the whole economy look better than it really is.

Here’s why that’s important for your wallet—and how you can make sure you don’t get caught on the wrong side of the divide.

A ‘Tale of Two Economies’

According to a new report by the Federal Reserve Bank of New York, high-income Americans are not only surviving inflation; they are strong in it.

The data shows that households earning more than $125,000 a year will increase their income-adjusted spending by 2.3 percent from 2023. Meanwhile, households earning less than $40,000 saw their spending barely decrease, increasing by less than 1%.

It gets even more complicated when you look at education. Spending money on households that don’t actually have a college degree he fell below the initial 2023 levels for most of last year. In contrast, college-educated families increased their income by 4%.

This creates a strange illusion. When you look at the “average” American consumer, things look good. But that rate is driven by the richest 20%, who account for nearly 40% of all consumption.

They buy new cars, stock up on expensive restaurants, and book vacations. If you are not in that group but you are trying to live like you are, you are entering a financial trap.

Don’t try to keep up with ‘K’

The danger of this place is social pressure. When you see your neighbors redecorating their kitchen or your friends posting vacation photos, it’s natural to feel like you’re falling behind. You might think, “Well, the economy is booming, so I should spend, too.”

But if their income is above that “K” and yours isn’t, trying to match their lifestyle is a fast track to debt.

(See “How the Rich Spend Money Differently From Everyone Else”)

We see this play out in credit card delinquency rates. While the wealthy paid off their balances, low-income and low-income borrowers fell behind on payments at the highest rates during the decade.

You should ignore averages. The “average” spending habits of the American people are currently shown mostly by people with a lot of disposable income.

How to protect your economy

You can’t control what the Federal Reserve does, and you can’t control the trend of the national currency. But you can build a wall around your finances.

1. Stop waiting for prices to drop:
There is a lot of waiting on the sidelines right now. People are waiting for housing prices to crash or for groceries to become cheaper again. Although inflation has cooled, prices rarely go away back. Adjust your budget to get the reality of today’s prices, not what things cost in 2019. If you hold your breath for an inflationary crash, you may die before it happens.

2. Check your ‘Big Three’ expenses:
It’s easy to pay too much attention to small purchases like streaming services or coffee. But when you feel stuck, the problem is usually in three major categories: housing, transportation, and food.

Do you drive a car with a payment that eats up 15% of your take home pay? Are you renting an apartment that stretches you too small? Downgrading a car or moving to a cheaper place isn’t fun, but it’s a very quick way to free up hundreds of dollars a month.

(See “5 ‘Old School’ Habits That Really Cost Money”)

3. Build a ‘freedom fund’ (not just an emergency fund):
Many people treat savings as something to be used only when disaster strikes—like a catastrophic illness or medical debt.
Try to change that mindset. Cash in the bank is not just for emergencies; “it’s your freedom bag.” It’s money that allows you to leave a toxic job, negotiate a better salary, or sleep easy when the headlines say a recession is coming.

If you’re relying on credit cards to bridge the gap between payments right now, you’re at risk. The rich spend because they have a cushion. If you don’t have that cushion, you need to close your wallet until you do.

(See “The Secret to Living Less Than Your Money”)

An important point

The headlines may say the economy is strong, but your bank account may tell a different story. Both can be true at the same time.

We live in a split screen recovery. If you do well, enjoy it—but keep saving. If you’re feeling tight, don’t let the top 20% of spending habits fool you into thinking you can afford the things you can’t afford.

Focus on your balance sheet, ignore the hype, and live your life. That’s the only economy that matters.