Living paycheck to paycheck is defined as spending your entire bank account before your next pay cycle. Your take-home pay equals or falls just short of your monthly expenses. Necessities like rent, mortgage, groceries, daycare, and transportation leave little room for discretionary income. Quality-of-life purchases — a gym membership, a night out, a new book — are often out of the question.
Living paycheck to paycheck can feel like an endless scramble, and if you’re trying to get out of the loop, you’re not alone. In 2019, 59 percent of Americans were living paycheck to paycheck, and 49 percent entered 2020 expecting to continue draining their bank account every month.
It’s nearly impossible to focus on long-term savings goals when short-term financial woes stand in the way. It’s part of the reason 37 percent of Americans didn’t expect to pay into their retirement in 2020 and 32 percent are just trying to build savings.
Building a financial cushion — the very thing that will break paycheck-to-paycheck living — gets put on the backburner in this scenario. How do you stop living paycheck to paycheck? Let’s tackle the issue to break the cycle for good.
1. Make a Budget
It’s important to create one central location to track your spending and income. This helps you hold yourself accountable and allows you to know exactly where your finances stand. If you’ve never planned a budget before, it can feel intimidating. You may not know where to begin and you may feel overwhelmed with the idea of looking so closely at your finances. There are lots of tools to help you, from pre-prepared spreadsheets to budgeting apps like Mint, and nothing is more relieving than fully understanding and taking hold of your financial situation.
Focus On Your Financial Goals
Before you detail your budget, sit down and consider what your financial goals are. These accomplishments should be focused on steps to help you stop living paycheck to paycheck. A priority in this situation should be to build your savings. Start out by trying to save $1,000, which should be enough to cover a rainy day.
The simplest and most popular budgeting strategy may be the 50/30/20 rule. This breaks your income into three categories — your essentials, wants, and savings — so you know how to most effectively use your paycheck. Half of your paycheck should cover the essentials, 30 percent is for you and the remaining 20 percent goes towards your savings goals.
2. Track Your Spending
You can easily spend way more money than you have if you don’t maintain a budget and track your purchases. That’s why it’s important to go over your bank statement from the last few months when you prepare a budget so you don’t end up like the 65 percent of Americans that don’t know what they spent last month. It’s a great first step to identify your spending habits and where to improve.
Don’t forget to plan ahead for larger expenses, like birthdays, holidays, and annual dues. Mark these expenses in a calendar and consider where you can cut back on that month’s expenses.
3. Cut Costs Where You Can
Once you’ve looked at where you stand within the 50/30/20 rule, and have a full understanding of your spending habits, then you can get to work trimming down your essentials and wants to begin saving.
Calling your service providers is a good place to start if you’re over 30 percent for essentials. Ask about their service plans and payment options to determine if there’s a better option that meets your needs. You may consider changing providers for a better deal, or even to help you negotiate with your current provider.
If you still can’t get under 30 percent right away, the extra expenses should come out of your wants money. Buckling down for a few months will be hard, but it will be a huge relief once you come out with some money saved and your debts paid down. Plus, it can save you in the long run from high-interest costs.
4. Get Rid of Credit Cards
Carrying a credit card balance from month to month can keep you in the paycheck-to-paycheck loop. For example, let’s say you have a high balance with a monthly interest charge. If the interest charge is close to your minimum payment, it may be difficult to make a dent in your balance. This extends your credit card payments much further into the future.
It’s important to build your debt payments into your budget, and try to leave your credit cards at home. Once you get your balance under control, only use your credit card when you know the money will arrive within the pay cycle.
5. Pay More Towards Your Debt
Similar to credit cards, paying the minimum on your other debts only increases your long-term costs and prevents you from getting out from under it all. It’s a great idea to increase your payments as much as possible while still contributing to your savings. There are two main methods for paying off personal debt.
The Snowball Method
The snowball method is all about momentum through little wins. Figure out which account you owe the least to, then increase your payments towards this debt while paying the minimum to your other accounts. While you pay more interest in the long run, you get the huge reward of paying off an account a lot more often, and you have more to contribute to your larger balances after each account closes.
The Avalanche Method
This method will save you money in the long run as you focus your largest payments on the balances with the highest interest rates. You won’t see accounts close as quickly, which can feel discouraging, but you can save thousands on interest by closing accounts early.
6. Slowly Increase Your Savings Contributions
In the early days of saving, it’s all about consistency, not size. Slowly increase your savings allocation until you’re contributing 20 percent of each paycheck per month.
Unsure of how to save when you’re living paycheck to paycheck? Start small. Try cost-saving tactics like meal planning, opting for generic home brands, and cutting any monthly expenses you can live without. Is your cable bill too high? Switch to streaming services or limit your TV consumption to trim your bill. These changes may seem small, but they can quickly compile into significant savings contributions.
7. Start a Side Hustle
If you’re relying on credit cards, payday loans, or friends and family to manage your necessary expenses, then it’s likely time to consider alternate ways to make money. The good news is, freelance work is readily available with the rise of the gig economy, and there are plenty of ways you can make some extra cash.
Utilize your network to find freelance jobs as a writer, designer, artist, or whatever suits your skills. If you’re looking for something quick and easy, consider gig apps you can easily fit into your schedule and work as you need.
8. Embrace Minimalism
Minimalism is a great way to save some money and reduce stress. Consider what you really need in your life, and only collect wants that bring you joy or a clear benefit to your life. It’s a great way to reel in impulse spending and improve your lifestyle habits.
This is also a great way to clean your house and clear out some unneeded and unwanted clutter. Consider selling what you can to make some quick cash. You can also donate valuable items for a tax deduction next spring.
9. Plan Ahead
Now that you’ve built a budget and set some goals, lay out a timeline and a clear plan for how to get out of the paycheck to paycheck loop. Plan how much you should have saved by when, and work out little rewards for yourself to help get you there. Then, figure out what you’re saving for and how you’ll celebrate the financial freedom of a comfortable safety net.
10. Stay Motivated
It’s important to remember that budgeting is a lifestyle shift. Choose a friend or family member to keep you on track in your savings and budgeting goals. When you need a boost, check back in with your goal. How much closer have you come to building an emergency fund? Even putting the plan in place is a huge accomplishment.
How Living Paycheck to Paycheck Hurts Your Financial Well-Being
Little to No Room for an Emergency Fund
More pressing concerns infiltrate the mindset of paycheck-to-paycheck life. Inevitable costs, such as car repairs or health emergencies, can lead to significant financial hardship. This way of living also prohibits long-term plans like taking a family vacation or saving up for a child’s college education. In the worst-case scenarios, those with little cushion turn to credit cards or high-interest loans, piling more onto their monthly expenses.
Daily anxiety lies beneath every purchase, from the grocery store to the doctor’s office. Without an end in sight, it’s easy to feel burned out or too stuck to improve your career or financial health.
Breaking the paycheck-to-paycheck cycle takes persistence and strategy. There are methods for adjusting your spending, savings contributions, and income channels, even when it feels like you’ve exhausted all your options.
Even if you can cover your basic expenses with your income, you may be faced with an emergency cost you have no savings to cover. In these cases, many turn to high-interest loans and credit cards to survive, adding a higher monthly expense to an already stressed budget. If you end up having to default on these payments and they go to collections, your credit can suffer and prevent you from reaching larger financial goals.
These high interest rates will also cost you much more in the long term. It’s not uncommon for debt balances to accumulate 50 percent or more of your original balance in interest, costing you thousands.
It May Cost You Your Retirement
There may be no hard and fast rule for breaking the paycheck to paycheck cycle, but patience is key. Consider what is within your control and build a plan from here. A budget puts everything in perspective and highlights places where you struggle.
Once you see the problem, it’s much easier to take action. Small, consistent lifestyle and budgeting changes do make a difference over time. When in doubt, always turn to your community for support. Living paycheck to paycheck is a common issue and one that requires focus and determination to break.
Sources: The Federal Reserve | Charles Schwab | FNBO