Living paycheck to paycheck creates constant stress in your life. You try to make financial plans, but you never seem to have any money. Slowly, you become emotionally and financially drained.
According to many studies, more than half of Americans live paycheck to paycheck. Today, of course, we’re dealing with the COVID-19 pandemic, which has wiped out many emergency savings accounts. But this is a temporary economic disruption.
The most common reason people live on the financial edge is that their expenses exceed their income. If your salary is small and you live in an area where the cost of living is high, you’re never going to have money to fuel your financial goals. Poor money management or failure to control your spending can cause you to be broke at the end of every month.
You can break free of the paycheck-to-paycheck cycle. Here are five steps to help you do it.
This step may be unpleasant, but without it, you won’t know what to change.
- Conduct an honest assessment of your financial habits.
- Review your credit card receipts and out-of-pocket expenditures for the last several months. Identify where your money is going. You might be shocked to see how much you are spending on unnecessary things.
- How about your income?
- How much are your rent or mortgage, utilities, and other monthly bills?
- Is your salary enough to cover everything? Are you due a raise or promotion? Can you increase your income?
2. Debt Management
Some debt is useful, such as mortgages or student loans, but most debt, such as credit card debt and auto loans, are not good for your financial health. If you’re carrying a lot of debt, you’re going to have a more challenging time pulling out of the paycheck-to-paycheck cycle.
Make a list of your debt, the total amount owed, interest rates and fees, and your monthly payment. Are you falling behind on any of your debt payments?
Take advantage of ways to reorganize your debt to make it more affordable. If you have a lot of credit card debt, consider consolidating with a balance transfer card or a personal loan. You might get a better interest rate and lower your monthly payment. Explore whether refinancing your student loan or mortgage will result in better interest rates.
Many consumers are trapped in the paycheck-to-paycheck cycle because they don’t budget. Now that you’ve assessed your income, spending habits, and organized your debt, you can create a realistic budget.
If you list all your expenses and they’re greater than your income, then you have two options:
- decrease your spending
- boost your income.
Are you spending money on things you don’t need, such as unused subscriptions, memberships, streaming services, or bank fees? How about your grocery bill? What can you do without so that your monthly expenses become more manageable?
If your expenses are already pared down to the bare necessities, then boosting your income is the only way to stop living paycheck-to-paycheck. Fortunately, there are many opportunities in the booming gig economy today.
If you’re paying higher interest rates and fees because you forget to pay your bills on time, the best solution is to automate everything. Automating your monthly bills can help you escape from the paycheck-to-paycheck cycle. Plus, by improving your payment history, you’ll boost your credit score.
Take advantage of fintech apps that alert you when your checking account is on the verge of being overdrawn. You’ll avoid overdraft fees.
5. Open an emergency savings account.
Yes, you barely have enough to make it through the month. But, once you employ the above strategies, you’ll find yourself with extra money. Make it a priority to put that money into an emergency savings account. The inability to cover those unplanned expenses, such as when the car breaks down, can destroy all the work you’ve put into organizing your financial life. Save as much as you can and slowly build up as your financial situation improves.