If you’ve walked into a restaurant lately and waited 45 minutes for a table, or tried to book a flight and saw sold-out seats, you might be scratching your head.
We keep hearing that people are struggling. Credit card debt is rising. Savings are down. Yet, everywhere you look, people seem to be spending money like it’s going out of style.
So, what’s going on?
The answer isn’t that everyone is doing well. It’s that a specific group of people is doing really, really well, while everyone else is quietly cutting back.
New data just confirmed what many of us have suspected for a while: we’re living in a “K-shaped” economy. One arm of the “K” is going up, and the other is going down. The problem is that the people on the way up are spending enough to make the whole economy look rosier than it actually is.
Here’s why that matters to your wallet—and how to make sure you don’t get caught on the wrong side of the split.
The ‘Tale of Two Economies’
According to a new report from the Federal Reserve Bank of New York, higher-income Americans aren’t just surviving inflation; they’re powering right through it.
The data shows that households earning over $125,000 a year have boosted their inflation-adjusted spending by 2.3% since 2023. Meanwhile, households earning under $40,000 have seen their spending barely budge, rising less than 1%.
It gets even starker when you look at education. Spending by households without a college degree actually fell below early 2023 levels for most of last year. In contrast, college-educated households ramped up their spending by 4%.
This creates a weird illusion. If you look at the “average” American consumer, things look fine. But that average is being pulled up by the wealthiest 20%, who are responsible for roughly 40% of all consumption.
They’re buying the new cars, filling the expensive restaurants, and booking the vacations. If you’re not in that group but you’re trying to live like you are, you’re walking into a financial trap.
Don’t try to keep up with the ‘K’
The danger of this environment is social pressure. When you see your neighbors renovating 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 growing, so I should be spending, too.”
But if their income is on the upper arm of that “K” and yours isn’t, trying to match their lifestyle is a fast track to debt.
(See “How the Wealthy Spend Money Differently From Everyone Else”)
We’re seeing this play out in credit card delinquency rates. While the wealthy are paying off their balances, lower- and middle-income borrowers are falling behind on payments at the highest rates in over a decade.
You have to ignore the averages. The “average” spending habits of Americans right now are heavily skewed by people with a lot of disposable income.
How to insulate your own economy
You can’t control what the Federal Reserve does, and you can’t control national inflation trends. But you can build a wall around your own finances.
1. Stop waiting for prices to drop:
There’s a lot of waiting on the sidelines right now. People are waiting for housing prices to crash or for groceries to get cheap again. While inflation has cooled, prices rarely go backward. Adjust your budget for the reality of today’s prices, not what things cost in 2019. If you’re holding your breath for a deflationary crash, you might pass out before it happens.
2. Audit your ‘Big Three’ expenses:
It’s easy to obsess over small purchases like streaming services or coffee. But if you’re feeling the squeeze, the problem is usually in the three biggest categories: housing, transportation, and food.
Are you driving a car with a payment that eats up 15% of your take-home pay? Are you renting an apartment that stretches you too thin? Downgrading a vehicle or moving to a cheaper unit isn’t fun, but it’s the fastest way to free up hundreds of dollars a month.
(See “5 ‘Old School’ Money Habits That Are Actually Costing You”)
3. Build a ‘freedom fund’ (not just an emergency fund):
Most people treat savings as something to use only when disaster strikes—like a broken transmission or a medical bill.
Try flipping that mindset. Cash in the bank isn’t just for emergencies; it’s your “freedom fund.” It’s the money that allows you to quit a toxic job, negotiate a better salary, or sleep soundly when the headlines say a recession is coming.
If you’re relying on credit cards to bridge the gap between paychecks right now, you are vulnerable. The wealthy are spending 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 Getting Rich Is Living Below Your Means”)
The bottom line
The headlines might say the economy is strong, but your bank account might tell a different story. Both can be true at the same time.
We’re living in a split-screen recovery. If you’re doing well, enjoy it—but keep saving. If you’re feeling the pinch, don’t let the spending habits of the top 20% trick you into thinking you can afford things you can’t.
Focus on your own balance sheet, ignore the hype, and live your own life. That’s the only economy that really matters.