What does it mean to live paycheck-to-paycheck? If virtually every cent of your hard-earned money is going to bills and other necessities, with no surplus being added to savings, then you’re living paycheck-to-paycheck.
One primary symptom of a paycheck-to-paycheck lifestyle is the constant crawl into debt. If you’re holding onto any amount of debt, then getting out of the paycheck-to-paycheck lifestyle is increasingly harder.
You’re not alone if you’re living paycheck-to-paycheck. It turns out that over three-quarters of the American population lives this way. Even people who are making six figures a year tend to get caught in this cycle. So what can you do to end living paycheck-to-paycheck? Continue reading to learn techniques you can use to stop living paycheck-to-paycheck.
Budget
Budgeting is a word that doesn’t sit well with many people, because it evokes the idea of living a boring life where you’re recording every penny leaving your account. The thing is, budgeting is the most useful thing one can do to become a financial pro. And there are several tools and techniques you can use to make budgeting easy.
50/30/20. The 50/30/20 rule is a very popular technique that involves splitting expenses into three main categories:
- 50% of expenses go towards necessities, which include housing, bills, and food.
- 30% goes towards lifestyle expenses, such as entertainment and dining out.
- 20% is the remainder to be put towards savings.
With the 50/30/20 rule, you’ll develop an excellent baseline for working on your budget. From there, you can use other budgeting tools to track your expenses further.
Budgeting Tools
Tracking your expenses can be done easily with the plethora of budgeting apps available on desktops and smartphones. In one of the previous posts, we went over a list of best budgeting apps based on cost and ease of use. You can refer to it if you want to try a useful budgeting tool. For example, Intuit’s Mint app is one such budgeting tool that allows you to link all of your bank accounts. Once your accounts are linked, Mint will automatically split your expenses into various categories. These categories can be used to build budgets that are conducive to your lifestyle.
Creating a budget is just the first step for ending living paycheck-to-paycheck. Next, use the above budgeting techniques to help yourself get out of debt so that you can start saving money.
Lower your expenses
Part of your budgeting endeavors should include identifying which of your expenses can be lowered. Many of us are living outside of our means and have fallen victim to consumerist culture. Take a look at some of your monthly expenses and see what can be eliminated or reduced.
Buy a cheaper car. Perhaps you don’t need that luxury sports car with the upgraded features, after all. Selling an expensive vehicle for something more stable and fuel-efficient could instantly save you thousands in the long run.
Move to a cheaper neighborhood. Like with cars, housing is often something that we overshoot. Instead of living downtown, see if there is something further towards the edge of city limits where rent is typically cheaper. Temporarily downsize your square footage if possible. A good benchmark is to make sure that your rent payments are no more than about 30% of your monthly income.
Memberships and subscriptions. Tally up all of your subscription services and memberships and see what you can cut. Do you really need the fastest possible internet and cable package? Is it really necessary to have access to every streaming app? Additionally, see if you can reduce or eliminate your gym membership by going to a cheaper gym or simply jogging outside.
Get out of debt
Debt is arguably the biggest factor causing people to live paycheck-to-paycheck. It only takes a small amount of overspending to suddenly find yourself in an endless loop of making minimum payments and accruing interest fees. For this reason, getting out of debt should be a primary goal.
Reduce credit card use. First thing’s first, if you have a bad habit of maxing out credit cards, then break that habit. If you have multiple credit cards, consider hiding or chopping up all but one. Earning cashback rewards on a single card may still be a reasonable idea, but make sure that the primary credit card is used responsibly. All the while, continue to make payments on the other cards until they are paid off.
However, the really determined person will stop using credits cards completely until they are fully paid off. Paying off multiple credit cards can be gamified using the following technique.
Snowball method. Snowballing your credit card payments is a mentally rewarding way to get out of debt. Start by choosing the credit card with the smallest balance and make the maximum payment that you can handle on it until it’s paid off. Continue making minimum payments on your other cards until the first card is paid off.
After the card with the smallest balance is paid off, carry over the payment amount you were making on it to the next smallest balanced card. Continue making minimum payments on the other cards. Keep doing this until you reach your card with the highest balance, and make the maximum payment that you can handle on it until it is paid off.
Reversing the snowball technique so that you start with your highest balanced card is a viable option too. This version of the snowball technique means that paying down your cards gets easier over time.
Start saving
As soon as you’re out of debt, it’s time to start saving. It’s best to start saving money only once you’re out of debt. Interest fees on credit accounts accrue quicker than the interest earned on savings accounts.
Ideally, you’ll want to open up a savings account with a high yield percentage. At best, you can usually find savings accounts with yields of up to 2%. This means that you’ll earn up to 2% extra income on the money you have sitting in the account over time.
Savings account options include employee retirement accounts and Individual Retirement Accounts (IRAs) — like the Roth IRA — or savings accounts through banks and Certificate of Deposits (CDs).
Automatic deposits. Open up a savings account and set up automatic deposits. Start with a low deposit percentage of up to 5% of your paycheck, and work your way up as you feel more comfortable.
Have a goal in mind. When saving money, it helps to have a future goal in mind in order to build motivation. A good goal would be a deposit on a large purchase such as a car or home. Or maybe you would like to take that long vacation you have always dreamed of finally. Certain budgeting apps — like Intuit’s Mint — have built-in goal-setting functions.
Save “extra” money. Any extra money that you receive, either through a job bonus or a gift, should immediately be set aside into savings.
Increase your income
While it’s easier said than done, oftentimes, an excellent way to help end living paycheck-to-paycheck is to increase your income. Apply for a second part-time job, or capitalize on the “gig economy” with a new side hustle.
Side hustles. Nowadays it’s fairly easy to pick up a small side job to earn an extra few hundred dollars a month. Ridesharing apps like Lyft and Uber are always an option, for example. You can also pick up online freelancing gigs through sites like Upwork.
Invest. Assuming you are debt-free, it may be feasible to start investing in assets. Investing can come in low to high-risk forms and will depend on your personality. Real estate and the stock market are good assets to start investing in. Eventually, these could potentially turn into massive sources of passive income.
Final Thoughts
Living paycheck-to-paycheck will greatly limit your future possibilities. While the majority of the world does live paycheck-to-paycheck, this is mostly due to bad spending habits, which can be unlearned. Budgeting and tracking expenses are the first steps toward financial freedom. Then, you will want to lower your expenses and get out of debt. Once you’re out of debt, it’s time to start saving. Having a surplus of money in a savings account is not only a good thing to have in an emergency, but it is peace of mind as well as the potential to do the things you want to do.