Living paycheck to paycheck is no fun, but a lot of people are stuck in that cycle. In fact, according to CNBC, 63% of Americans say they’ve been living paycheck to paycheck since the pandemic hit. It’s been hard for many families. However, with the recent vaccine rollout and another stimulus package passed, the economy is looking more hopeful as people look to the future and things getting back to normal somewhat. If you feel like you’re ready to stop living paycheck to paycheck, now could be the perfect time to work on this goal. Below are some basic steps that can help you break the paycheck to paycheck cycle even if money is already pretty tight. But first:
What Does It Mean to Live Paycheck to Paycheck?
Living paycheck to paycheck basically means you use all your income to cover your monthly living expenses. This can be difficult to manage because it means there is little to no money left over to save or pay off debt. If an unexpected expense or emergency came up, you might not be able to afford it.
Usually, toward the end of the month, your checking account might get dangerously low and you await your next paycheck. This presents the opportunity to take on debt by using a credit card or taking out high-interest payday loans. The cycle repeats itself over and over each time you get paid.
This is also commonly referred to as the ‘rat race’ where you might feel stuck between working and earning just enough to meet your basic needs.
The Key: Get Ahead One Month
In order to stop living paycheck to paycheck this year, you’ll need to get one month ahead financially. This is the key to breaking this ongoing cycle. Instead of letting your paycheck determine what you can spend and when, determine how much you generally need to cover expenses each month.
Then, you’ll need to produce this amount of money upfront to live on. Proceed to save the money you earn that current month, then use that income for your expenses the following month. Here’s an example of how that would look.
Suzie lives paycheck to paycheck. Her expenses are around $3,200 per month. Suzie gets paid twice a month and immediately uses her paycheck to cover the current month’s bills. Toward the end of the month, Suzie has spent nearly her entire income paying for bills and living expenses.
During the days leading up to her next paycheck, she impatiently waits for that new income to come in and cuts back on spending drastically while trying to stretch her needs and delay bills that are due since she no longer has the money on hand to pay for it.
At the start of a new month, Suzie get paid again and repeats the cycle over and over again.
Suzie does not live paycheck to paycheck. Suzie spends $3,200 per month between all her bills, groceries, gas for her car, and entertainment.
By May, she has saved up $3,200 to use to cover her expenses for the month. Throughout May, she receives two paychecks from her employer but does not spend this money. Instead, she lets it sit in her checking account or transfers it to her connected savings account.
In June, Suzie adjusts her budget based on the income she earned in May and spends that income on bills and other expenses. Since she already have all the money she needs for the month on hand, she can also decide how much she wants to save and have a better chance at meeting financial goals.
During June, Suzie gets paid twice again by her employer. She does not spend this money in June but holds onto it to spend for July’s budget.
See the difference? In Scenario B, Suzie is living on last month’s income. She is not stuck waiting on a paycheck and knows exactly how much she has to budget with. If she got sick and had to miss a few days from work, her budget technically wouldn’t be affected until the following month. This would allow her enough time to work out a plan to withdraw from savings, or earn extra money after she returns to work if needed.
Plus, living on last month’s income makes it easier for Suzie to save a specific amount each month. With more savings, Suzie becomes more financially secure and has more options overall. If you’re ready to become like Scenario #2 Suzie, here are 5 steps to help you stop living paycheck to paycheck this year.
1. Determine What Your Monthly Expenses Are
Always start by creating a budget and narrowing down your monthly expenses. How much do you need to live on every 30 days? Be honest and track your spending by using an app like Mint or reviewing your bank statements for the past 30 to 60 days.
Once you have your numbers down, you’ll know how much you need to save to get one month ahead.
2. Cut Back on Wants
In order to save one months’ worth of expenses, you may need to temporarily cut back on wants and additional spending. Pay close attention to how much you spend on things like dining out, lunches, hobbies, subscriptions, etc.
Go on a spending fast or have a no spend week and use the savings to help you reach your target goal.
3. Focus on Paying Off Debt First If It Helps
Sometimes, you might find that you’re living paycheck to paycheck due to all your debt. If you have thousands of dollars in credit card debt or personal loans, consider paying those off first. Your monthly expenses can be drastically decreased when you have less debt. This will also give you a smaller amount to save when you’re trying to get one month ahead.
4. Earn Extra Money As Needed
One of the best ways to stop living paycheck to paycheck is to earn extra money. Then, use that extra money wisely to get ahead financially. Realize that if you want to earn extra money, there are several ways to do it. You can sell your old stuff online, get a part-time job, or offer a service as a freelancer. You can also deliver food with DoorDash or offer to babysit for friends.
Set an income goal then determine what you’d like to do for extra cash. When you earn extra money, make sure you put it directly toward savings (after any expenses and taxes if you’re doing contract work), so you can meet your goal faster.
5. Commit to Living Below Your Means
Once you feel like you’re earning enough money and budgeting well to stop living paycheck to paycheck, commit to living below your means for life. I love living below my means because it means that I always have money leftover for savings and other goals. If you earn $5,000 per month but keep your monthly expenses at $3,800, you’ll essentially have $1,200 leftover each month for whatever you want.
Use that money strategically to save, invest, pay off debt, and build passive income. Then you won’t ever have to worry about breaking the paycheck to paycheck cycle again.