7 tips for going from a living paycheck to a paycheck – Forbes Advisor
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The life of paycheck to paycheck can drain you financially and emotionally.
The money comes in and just as quickly it comes out. You want to put something aside to save or reduce your debt, but your income never seems to stretch as far as you need it to.
It’s a common financial challenge that many Americans – 59% to be exact, according to a 2019 Charles Schwab study-have a hard time with. (Interestingly, at the same time, 59% of Americans considered themselves to be savers.) That same report found that 44% of Americans typically have a credit card balance or struggle to pay their bills. each month.
Living from one payday to the next can be attributed to a variety of causes. Low wages, for example, can make progress more difficult. The same goes for living in a higher cost area or having a mountain of student loan debt to be conquered. And, in some cases, it may just be the result of poor money management or out of control spending habits.
Getting caught up in the paycheck-to-pay cycle isn’t pleasant, but it doesn’t have to be a permanent situation. There are steps you can take to overcome it and get on the path to financial prosperity.
1. Identify your financial problems
In order to move beyond the paycheck to live on a paycheck, you first need to have an idea of why your finances are the way they are. A good place to start is to review your spending habits.
Round off your bank and credit card statements for the past three to six months. Then go through them line by line to see exactly where your money is going on a regular basis. It can be an eye-opening experience if you’re not used to tracking your spending.
The next step is to look at your income. You may not be making enough money to go from a paycheck to a living salary because your paycheck doesn’t allow it yet.
The point of taking a fresh look at your finances is simple. If you can figure out what the biggest obstacles are, you can create a plan to overcome them.
2. Streamline your spending
Budgeting and tracking your spending are two of the most effective ways to take control of your finances. When you live paycheck to paycheck, they can be invaluable in breaking out of the cycle.
If you have a monthly budget, then it’s time to take a look at it to see which expenses are needs and which are wants. This is where you may need to make some tough cuts to bring your spending more in line with your income, so you don’t rely on credit card to fill the void each month.
One tactic you could try to gain traction with your budget is a spending freeze or a no-spend challenge. The idea is that you agree not to spend money on anything other than the basics, like food or accommodation, for a set period of time. For example, you can try a no-spending week or a one-month spending plan.
This type of financial challenge can be a test of your willpower if you’ve ever struggled to overspend. But if you can stick with it, it can shed some light on what constitutes a need versus a want within your budget.
3. Reassess your debt
According to New York Federal Reserve data, total household debt reached $ 13.95 trillion in the third quarter of 2019. This is $ 1.3 trillion more than the previous high of $ 12.68 trillion in third quarter debt. of 2008 in the midst of the financial crisis.
In other words, you are not alone if you have credit card debt, car loan debt, mortgage debt, or student loans. Making multiple debt payments each month could easily make it much harder to exit the paycheck cycle.
If you are in debt, think about what it costs you in terms of monthly payments, interest, and fees. Then look at what you could do to reduce some of that cost so that you can create some financial wiggle room.
Private refinancing student loans or a mortgage, for example, may result in a lower interest rate. It could also lower your monthly payment, not to mention save you money in interest charges.
If you have credit card debt, you may be able to get some relief by taking advantage of the promotional 0% APR. balance transfer offers. One thing to consider, however, is the balance transfer fee. These fees are typically $ 5 to $ 10, or 3% of the amount transferred, whichever is greater, and are added to your balance.
4. Make planned savings a priority
Saving money can be an uphill battle when living paycheck to paycheck. Sixty-nine percent of Americans have less than $ 1,000 in savings, according to the annual GOBankingRates survey. Almost 33% of survey respondents said they couldn’t save because they lived from payday to payday.
Having savings aside is important because it helps you avoid incurring new debt if an unforeseen expense arises. Saving can also help you reach bigger financial goals, like buying a home, if you’re still a tenant, or planning for retirement.
The secret to moving away from a paycheck-to-paycheck lifestyle and shifting to regular savings is to treat it like a monthly expense. Instead of making saving an afterthought, you include it as part of your budget like any other bill you have to pay. It can help entrench the habit of saving if you make a commitment to pay your savings “bill” each month.
5. Automate your financial life
When you live paycheck to paycheck and try to change your finances, it helps make things as easy as possible. Automation is a good way to do this.
For example, automating your monthly bill payments ensures that your essential expenses are paid and that you don’t trigger late fees. Automate deposits in your savings account means you’re not tempted to spend the money you’ve planned to save.
If you don’t have your bills or savings on autopilot yet, consider taking the time to set it up with your bank. Take a look at your budget and paydays to make sure the money you need for your bills or savings is there when you need it. Otherwise, you could run the risk of triggering an overdraft fee.
A good way to avoid an overdraft is to create a buffer in your checking account. It’s money that you keep checking but pledge not to spend. Having a little cushion can help you avoid expensive bank charges while you make the adjustment to automate your finances.
6. Consider how you can increase your income
If too low an income is preventing you from living from paycheck to paycheck, it’s time to think about ways to change that.
For example, it could mean taking more hours of work if you get paid by the hour or get a part-time job. If you have a salaried position, you may want to consider negotiating a raise or seeking promotion to a higher paying position.
Starting a business or a side activity can also be an avenue that you want to explore. Forty-five percent of Americans have a side job outside of their regular job. One in three people say they need the additional income generated by their economic activity to stay afloat financially.
When choosing a side activity, think about how much time you can devote to it and what skills or interests you have that could pay off. Self-employment online is a popular option, but you can just mow lawns or walk neighbors’ dogs for extra cash. Finding the bright side is choosing something that works for you.
And don’t forget to budget the extra money you earn. Every additional dollar that is on top of your regular salary should have a job, whether it’s saving money, paying bills or paying off debt.
7. Set Clear Money Goals
Having clear goals to achieve financially can be a motivator to break out of the paycheck-to-paycheck model. If you don’t have financial goals to focus on, think about what you would like to achieve with your finances.
Do you want to pay off your debts, save some money, or finance an even bigger dream, like early retirement? Once you have a goal in mind, make it as specific as possible, outlining the individual action steps you will need to take to achieve that goal. Then ask yourself if this goal is realistic, based on your current financial situation.
If the goal is realistic, the last step is to establish a timeline to achieve it. Using this process to set yourself financial goals can inspire you to step away from salary and improve your financial situation.
When setting your financial goals, don’t forget to check your progress regularly. And whenever you cross a goal off your list, think about what you would like the next one to be. It can help you keep moving forward with your finances so that ultimately living paycheck to paycheck becomes a distant memory.