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Do you find yourself in a cycle of eagerly waiting for your next paycheck, counting the days until your bank account balance will jump up from almost nothing? All the while, crossing your fingers that an unexpected bill doesn’t make you overdraft?
If you’re living the paycheck to paycheck lifestyle of financial stress, you’re not alone. Seventy-eight percent of American workers live paycheck to paycheck and can’t handle a financial hardship without taking on debt.
And this isn’t just a problem for those making minimum wage. One in four households earning $150,000/year or more live paycheck to paycheck. Of those making $50,000 – $100,000, one in three can’t survive without their next paycheck.
Just because you’re not alone, doesn’t mean you want to stay in this lifestyle pattern. Maybe you desperately want to get out, but don’t know how.
If that’s how you’ve been feeling, this post is just for you. In it, I’ve laid out the steps to take to break the cycle of living paycheck to paycheck.
Why Even Bother?
With 78% of U.S. workers living paycheck to paycheck, you may be wondering why you should even care? Why bother trying to get out of the cycle when that’s the “normal” thing to do?
Here are some of the best reasons to be weird and break away from the norm.
Relieve your financial anxiety. It’s stressful knowing you’re entirely reliant upon your next paycheck. If you get fired, how will you pay your bills? What if something beyond your control happens, like… a global pandemic. Being laid-off or furloughed without pay can be a life-disrupting, anxiety-ridden event if you can’t survive without your next paycheck.
Freedom to leave an undesirable work situation. If you must keep that next paycheck coming, you don’t have the power to quit your current job should you need to ASAP. Some work situations you can resolve; some you can’t. If you find yourself needing to leave a workplace, you have to job search, interview, and accept a new position before having the freedom to leave your current employment.
Opens up new opportunities for you. What if you got offered a unique job opportunity in your dream field of work? It’s the perfect position for you, and you know it would make you happy as well. But there’s one catch. The job won’t pay you as much as your current one until you’ve been there for a year. You live paycheck to paycheck and need every cent, so you have to pass on this fantastic opportunity.
So what’s your why? Maybe it’s listed above, or perhaps it’s something else entirely.
Now that you’ve established your why, let’s get to the good stuff: the how!
Spend Less Than You Earn
Spending less than you earn may sound like a no-brainer, but it’s much harder in practice.
However, this has to happen if you ever want to stop living the paycheck to paycheck lifestyle. You have to start moving your net worth in a positive direction.
Track Your Spending
If you aren’t in control of your money, your money will take control of you.
You need to know where your money is going before you do anything else. What are you spending it on? What is eating up your paycheck?
Do you have an extremely high car note, or are you ordering take-out six nights a week? Track your spending to start identifying all the different ways your paycheck leaves your pocket.
Implement a Budget
After you see where you’ve been spending your paycheck, it’s time to come up with your budget, if you don’t already have one.
Your budget is your financial plan, your process to get yourself spending less than you earn. A budget isn’t a bad thing. It doesn’t have to be this suffocating, party-pooper everyone tries to make it out to be. All a budget does is tell your money where to go on your path to relieving financial stress.
If you’re a little intimidated or aren’t sure where to begin, I have a free seven-day email course that will help teach you the basics of budgeting.
Trim Your Expenses
Whether you already had a budget or just created your first, it’s usually not enough to only track your expenses and record them in your budget.
Most people are surprised they’re spending so much on certain things when they first start tracking their expenses.
The key to getting out of the paycheck to paycheck cycle is to make yourself aware of where your money is running away from you so you can help it change directions.
Trim as much spending as you can to create a little breathing room in your budget. Cut out things that aren’t necessities or don’t add value to your life.
When most people begin looking at what they’re spending money on, they find a lot going to “waste,” they can immediately cut out.
But don’t stop there. Search for ways you can trim in other areas like cutting food costs, giving up cable tv, or negotiating your insurance bills down.
Manage Your Lifestyle
You’ve probably heard the phrase “living like a student.”
Once you finally graduate, many of us young professionals can go a little overboard after living off loans for years (watching every penny). We’ve felt “deprived” of all the fun things we see other people doing, and don’t we deserve to live that young professional lifestyle?
If you’ve felt this way, you’re at risk of lifestyle inflation – a significant factor that gets in the way of spending less than you earn.
Lifestyle inflation occurs when, over time, as you get a raise, you elevate your lifestyle by that same amount. For example, your new promotion gives you $100 extra dollars a month you weren’t earning before. Instead of saving that $100/month, you decide to upgrade your vehicle. Now your car note is $100 more than it used to be.
Not to say you can’t have a few more conveniences than you did when you were a student, but overall you should be living much the same until you get a sound financial foundation, and you aren’t living paycheck to paycheck.
If you aren’t living like a student, the good news is you can always deflate your lifestyle. Many times what keeps people in the paycheck to paycheck cycle is lifestyle inflation. If you’ve slowly leveled-up your living situation as you’ve received raises at work, you can always work towards dialing it back down.
This may require you to trade in your car for a more affordable one or move to a smaller house because your mortgage is taking over half your paycheck. Depending on your financial situation, it may not take moves this drastic to get you back where you need to be, but consider all your options, not just the easy ones.
Increase Your Income
Another way to bridge the gap between income and expenses is to increase the amount you earn. For most people, this is more difficult, and the results are less immediate than cutting costs and controlling over-spending.
However, there are several ways you can quickly start increasing the amount you bring home.
Ask for a Raise
If you’ve been putting in the hours and going the extra mile at work, your boss may have noticed. And if not, bring it to their attention.
Look for voids to fill; tasks that aren’t getting done or aren’t done to your employer’s satisfaction. Make yourself a valuable asset and document your progress and what you’ve brought to the table.
That way, you can show how you’ve improved the business and why you deserve the money you’re asking for when you ask for a raise.
It’s easy to feel intimidated and nervous when you’re approaching your employer about paying you more. However, having documentation of your contributions can help give you the confidence you need to walk into those negotiations with your head held high.
Start a Side Hustle
Oh, the side hustle, that familiar phrase Millenials won’t stop talking about. A side hustle can take on many forms, including starting a business, driving for ride-share companies, delivering take-out on GrubHub, or taking on some other part-time job. It can be anything you’re doing outside of your primary source of income to bring in additional cash.
However, some side hustles take time and commitment before you start seeing monetary gains, like creating a blog. Getting a weekend or part-time job outside of your nine-to-five will yield more immediate results for your pockets. It can give you the boost of income you need to start moving in a net positive direction.
If your employer allows over-time, volunteer to work it! Taking night or weekend shifts that others don’t want will have you raking in extra cash in no time. Not to mention, your co-workers may be thankful you picked up a shift they didn’t want to work.
Keep in mind continuously working over-time will burn you out quickly. Work-life balance is essential. Pick up extra shifts for a few months to earn what you need to quit living paycheck to paycheck; then you can relax a little.
Build a Cash Cushion
Now that you’ve found ways to decrease your expenses and increase your income, you’re finally spending less than you earn. Yay! But what do you do with the extra cash each month to make sure you don’t fall back into the cycle of living paycheck to paycheck?
Create an Emergency Fund
Just one emergency is all it takes to eat up the monetary breathing room you created by spending less than you earn. Something as commonplace as a car repair could cost you $500-600 or more.
Emergencies can set you back and quickly throw off your budget, if not make you go into debt trying to fix whatever the problem is.
Building an emergency fund means saving enough, so your monthly earnings won’t bear the burden of bankrolling an emergency. Start small by trying to have a month’s worth of expenses in a separate savings account. Then work up to having two month’s expenses in the account, then three.
An emergency fund isn’t only for when you need a car repair, or to fix a broken pipe. This is the money you can draw from if you unexpectedly get laid off, or your car gets totaled, and you buy the next one in cash to avoid a car loan.
Many different voices tell you how many months’ expenses you should have saved in your Emergency Fund. Some say three months, six months, a year.
The important thing is to just get started. When you have the first $100 saved in your EF, it can be discouraging to think how far away you are from having three or six months’ expenses set aside.
Having a small, more attainable goal at first, like one month’s expenses, feels much more reachable. As you keep saving more and more, consider your risk and comfort level. Maybe you feel safe having three months’ expenses saved. So stop there for a while and work towards other goals. But if you’re nervous having less than six months’ expenses, keep saving until you reach that goal. Your Emergency Fund is all about your comfort and security level.
Automate Your Savings
Out of sight, out of mind. Manually moving money into your Emergency Fund can sometimes be tricky. Now that you’ve cut expenses, it’s easy to see that extra money in your checking account and feel like you have more wiggle room with your spending. This can lead to other wants coming in to take that money away from you.
If you never see it in your checking account, it’s less likely to tempt you. Set up an automatic transfer from your checking account to your Emergency Fund, so you never have to think about doing it yourself each month.
Just as important as setting up an automatic transfer is to schedule it to leave your checking account as soon as you get your paycheck. Once that money is in the Emergency Fund, you’re way less likely to touch it for other reasons.
Money will find a place to run off. Immediately and automatically setting savings aside makes them harder to access. You have to stop and think about what you’re doing before transferring money out of your Emergency Fund.
Tackle Your Debts
Are you currently in debt as you’re starting this journey to end the paycheck to paycheck cycle? If you are, don’t worry. You can still find your way out.
I’m in debt; massive student loan debt. A lot of people are. And that’s not even considering car loans, mortgage debt, or credit card debt that you may have.
You can get out of living paycheck to paycheck if you’re in debt. You just have to tackle those debts properly.
Stop Accruing More Debt
A credit card is NOT your Emergency Fund. I can’t tell you how many times I’ve heard someone say, “I have a credit card in case of emergencies.” I cringe every time. It’s obvious they have no idea the situation they’re putting themselves in.
If you charge emergency costs to a credit card instead of having money saved in an emergency fund, you’ll only keep going further and further into debt. Life will happen; emergencies will cost money. And charging those emergency needs to a credit card with 14-20% interest is just making your emergency cost you 14-20% more!
Don’t finance large purchases. If you can’t save up and pay for it in cash, don’t buy it. Don’t finance an in-ground pool because you “deserve” it. Don’t pay 0% no-interest for the first year on that new furniture set. Don’t take out a vacation loan for your summer trip to Florida.
Every time you finance something, you agree to a monthly payment. Whatever that payment amount is, you obligate a piece of your paycheck to that thing every month until you pay it off. This means you have to keep paying on those items even if your salary drops or you get laid off.
On top of a monthly payment, financed items accrue interest as well. You’re paying more for the item in the long run than if you’d have saved up and bought it once you had the money.
Pay Down Your Current Debt
So you’ve decided you’re not going to take on any more new debt. But what do you do about the debts you already have?
Keep making those monthly payments, or start if you haven’t been paying them. Getting rid of debt is something you chip away over time. It takes patience and intention.
Sometimes you chip off more one month than the next, but make sure you’re at least making your minimum payments to keep your credit score increasing.
Do what you can to improve your debts and help you pay them off more quickly. Interest rates dropped? Refinance your mortgage or student loans. Transfer your credit card balance to a new card with 0% APR for the first year and pay it down faster while interest is no longer accruing.
Whether you’re just starting the process to stop living paycheck to paycheck or you’re almost there, congratulations!
Seriously, 78% of the people around you are living that life. They’re probably stressed and assume, “Well, that’s just how things are.” They don’t want to put in the work it takes to get there. So congrats on breaking away from being “normal.”
You’re already a step ahead, but why not take that next step now?
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