How to Stop Living Paycheck to Paycheck
According to a 2017 CareerBuilder survey, 78% of all workers say they live paycheck to paycheck. It’s not just low-wage workers who have this problem, either. Nearly 1 out of 10 workers making $100,000 or more say they always or usually live paycheck to paycheck, and 59% of them are in debt.
Living paycheck to paycheck is like being stuck in a hamster wheel; no matter how fast you run, you can never get ahead. Every penny you make goes toward paying the bills, and a major unexpected expense can completely derail your budget, sending you scrambling for the credit cards and driving you deeper into debt. There’s no money left at the end of the month to put toward long-term financial goals like buying a house or saving for college, let alone for luxuries like a nice vacation.
The good news is that there are ways to break out of the paycheck-to-paycheck cycle. With effort, you can trim your expenses and boost your income to create more wiggle room in your budget. Over time, you’ll be able to save money for your long-term needs and build an emergency fund so you’ll no longer have to fall back on credit in a crisis.
Here’s how to get started.
The first step to taking control of your finances is to figure out exactly where all your money is going. Many families don’t realize they already have more than enough to cover their bills because their extra cash gets frittered away throughout the month. Your goal is to track down those hidden budget busters and eliminate them.
So, for the next month, keep track of every single penny you spend, from your monthly rent payment to that dollar for a cup of coffee. Jot down your expenses in a notebook or use personal finance software like Mint to keep track of your spending.
Make your list as detailed as possible. Instead of just writing, “Groceries: $60,” keep the receipt so you can see exactly what you bought and what it cost. This will help you later when you’re looking for expenses to cut. Make sure to include hidden expenses too, like bank fees or the interest you pay on credit card debt.
Simply seeing all your expenses written down in black and white can be a revelation. For instance, you might realize you’ve been blowing nearly $30 a month on ATM fees or $50 a month grabbing a snack at the convenience store on your way home from work. Seeing how much these nickel-and-dime expenses are costing you could be enough to shock you into changing your habits, freeing up cash in your budget at the end of each month.
However, if you look at your expense list at the end of the month and still feel like you have no idea how to save, don’t worry; your effort hasn’t been wasted. It will help you move on to the next step: serious budgeting.
Once you have all your monthly expenses laid out, use that information to make a budget. Group your expenses into categories — such as food, utilities, and entertainment — and note how much you spend on each one. You can do this on paper, use a spreadsheet program like Microsoft Excel, or use dedicated budgeting software like Mint or You Need a Budget (YNAB).
Keep in mind that the costs you wrote down for the past month don’t necessarily reflect your spending for the entire year. You probably have recurring expenses that don’t come due every month, like quarterly property taxes or your annual auto registration. To fit these expenses into your budget, add up how much they cost you every year, then divide that number by 12 and add a line for it to your monthly budget. That’s the amount you should set aside each month to cover these costs when they arise.
You could also have expenses that vary from month to month, such as your utility bill. If your bill this past month was lower than average, setting aside that same amount for utilities every month won’t be enough. To deal with these fluctuating expenses, look back at your bills for the past year and add them up. Divide this total by 12 to get the average amount you’ll need for this expense in a given month and enter that in your budget.
Once you’ve figured out all your monthly expenses, subtract the total from your monthly income and enter the result on a new line under “Savings.” This is the amount you’ll be setting aside each month for your future goals. Of course, if you’ve been living paycheck to paycheck, there’s a good chance this amount is currently zero or even negative. Don’t worry; you’ll fix that in the next step.
To make room in your budget for savings, you need to look for other things you can cut. There are two main types of expenses in your budget: fixed and flexible. Fixed expenses are things that cost the same every month, such as your rent or car payment. Flexible expenses are those that vary from month to month, such as gas and groceries.
To save as much as possible, you need to look at both types of expenses. Flexible expenses are usually easier to cut since they don’t require major lifestyle changes. However, you can often find greater savings by cutting back on fixed expenses since these are some of the biggest items in your budget.
Examine your flexible expenses and look for unnecessary extras you could cut. Consider every single purchase you make, from a new suit to a pack of gum, and ask yourself: Did I really need that? If so, could I have bought it for less?
The first expenses you should consider cutting back on are luxuries, like dining out or entertainment. For instance, if you currently eat out three times a week, you could cut it down to one while also looking for ways to eat out for less. Similarly, you can trim your entertainment budget by finding cheaper concert tickets or renting movies instead of going to the theater. Other ways to stop sneaky budget busters include:
As you identify expenses to cut, adjust your budget to account for them. Take all the money you’re cutting out of categories like food or entertainment and add it to the savings line. It’s motivating to see how much money you’ll be adding to your savings every month.
However, don’t make the mistake of trying to take these categories all the way down to zero so you can save as much as possible. One of the main reasons budgets fail is that they’re too restrictive. Make sure to allow yourself some cheap luxuries to combat frugal fatigue.
If the savings line in your budget still looks pitifully small after you’ve cut all the luxuries you could find, perhaps your problem is that you’re spending too much on necessities. Cutting back on these expenses is more painful but offers the potential for big savings. Hone in on the largest lines in your budget; the more you’re spending now, the more it’s possible to save.
Here are some ways to cut the biggest expenses in your budget:
For most people, cutting expenses is the easiest way to boost savings. However, if you’re already living on a shoestring budget, there’s probably not much for you to cut. In this case, the best way to save more money is to make more money. There are two main ways to do this: earn more at your job or find ways to bring in income on the side.
At first glance, it may not be obvious how you can increase the income you get from your job. After all, your boss sets your pay rate, not you. However, if you look carefully, you’ll find there are actually several ways to give your paycheck a little boost. For instance, you can:
If you can’t find a way to earn more at your main job, don’t lose hope. There are many ways to make extra money on the side, such as:
Once you’ve found ways to set aside more money in your budget for savings, you need to start putting that money to work for you. If you simply leave it sitting in your checking account, it won’t earn much interest, and you’ll have to fight off the temptation to dip into it.
To avoid this problem, set up an automatic savings plan. Take the money you’ve earmarked in your budget for savings and automatically transfer that sum out of your account each month and into a separate savings account. Alternatively, you can arrange to have your entire paycheck directly deposited to your savings account on payday and then set up an automatic withdrawal of the amount you’ll need to cover your monthly expenses.
The best place to stash your growing savings is an interest-earning account at a separate bank. That way, you won’t be able to withdraw those funds as easily, so you won’t be tempted to use them for anything short of a real emergency. An online bank account is a good choice since it will earn a higher interest rate than a basic savings account. Other low-risk investments for your emergency savings include money market accounts and CDs.
You can give your savings an extra boost by banking financial windfalls. For instance, if you get a bonus at work or a refund on your taxes, don’t automatically spend it; tuck the money, or at least part of it, into your new emergency fund.
Similarly, whenever you get a raise, make sure to readjust your budget so part of that extra money goes into savings. It’s okay to use some of the cash infusion to pad your budget a bit and treat yourself to a few extra luxuries, but don’t spend it all. If you’ve been getting along on a budget of $3,000 a month until now, you can continue to get along on that amount or just a little bit more, sending the bulk of your raise into savings and investments.
At this point, you’ve gotten control of your spending, made a budget with room for savings, and started building wealth for the future. However, simply putting a budget down on paper isn’t the same thing as sticking to it over the long term. If you lose focus, it can be all too easy to slip back into your old habits and end up living paycheck to paycheck once more.
The key to keeping yourself on track is to focus on your goals. It’s much easier to stay motivated to save when you know exactly what you’re saving for. For example, maybe you’re hoping to save enough to put a down payment on a house, travel around the world, enjoy a comfortable retirement, or even achieve financial independence early.
Whatever you’re aiming for, write down your goal or find an image that brings it to mind and put it someplace where you’ll see it every day. This will keep your goal firmly in sight and make it easier to stick to your new budget.
If you’re still concerned you won’t have the willpower to stick to your new habits, it could help to have someone to hold you accountable. Share your new financial plan with a family member, close friend, or financial advisor and ask them to help hold you to it. Meet with them on a regular basis to let them know how you’re doing with your new plan. They can cheer your successes and encourage you to get back on track if you slip up.
There’s no way around it: making and sticking to a financial plan is a lot of work. It can be tempting to take the easy way out by simply borrowing money whenever you run short.
Unfortunately, that’s not a real solution. In fact, in the long run, it will make your problems worse by loading you down with debt you have to pay interest on. This will further eat into your available funds every month, sending you back for yet another loan, and on and on in an endless downward spiral.
To avoid getting caught in this trap, you must avoid relying on debt for your everyday expenses. This includes:
Escaping the paycheck-to-paycheck lifestyle takes time and patience. It’s kind of like trying to eat healthy if you’re used to a diet of junk food; you shouldn’t expect to change your habits overnight. Don’t be too hard on yourself if you slip up, but don’t take it as a reason to give up completely, either.
Instead, remind yourself again of what you’re working for. Think about how much less stressful your life will be when you know there’s money in the bank to cover any kind of unexpected expense. Focus on all the things you’ll be able to do with your savings, like paying off old debts or buying a new car.
Keep your eyes on the prize, then get right back on that horse and keep riding. You can do it!
Do you live paycheck to paycheck? What strategies are you using to get out of this cycle?
Updated: October 10, 2018
Categories: Budgeting, Money Management
Amy Livingston is a freelance writer who can actually answer yes to the question, “And from that you make a living?” She has written about personal finance and shopping strategies for a variety of publications, including ConsumerSearch.com, ShopSmart.com, and the Dollar Stretcher newsletter. She also maintains a personal blog, Ecofrugal Living, on ways to save money and live green at the same time.
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