Financial Planning
According to a survey conducted in February 2020, an astounding 49% of Americans expect to live paycheck to paycheck this year. If you’re part of the club and looking to escape the cycle, we’re here to help. Continue reading to learn step-by-step how you can stop living paycheck to paycheck and start progressing financially in life.
Determine why you’re living paycheck to paycheck
Before you can identify solutions to stop living paycheck to paycheck, you need to understand the causes that are contributing to your situation. What are the reasons you’re living paycheck to paycheck?
People live paycheck to paycheck for a variety of reasons; some don’t make enough money to support their lifestyle and save their income at the same time, while others deal with emergencies and get stuck with unexpected expenses. Some people are simply in need of a higher income – they live within their means but are unable to save enough to live beyond paycheck to paycheck.
Whatever the specifics of your situation are, the first step to moving past living paycheck to paycheck is to identify why you are. Is it because not enough money is coming in, or is it because too much money is going out? Not sure? Our next tip will help you find the answers you need.
Create a budget
Creating a budget is the only surefire way to know how much money is moving in and out of your account every month. For this reason alone, a budget is necessary if you want to stop living paycheck to paycheck.
While we’ve got a ton of resources on budgeting available on our site, here are two articles that will help you get started:
• How to Create A Monthly Budget
• 5 Apps That Can Help You Create A Monthly Budget (and Stick to It)
The first article will walk you through how to create a budget from start to finish, so if you’re new to budgeting, you can begin there. The second article covers a handful of prominent and intuitive budgeting apps available today. These apps truly make budgeting a breeze, so consider checking them out even if you’re not the most tech-oriented person.
Examine your relationship with money
When you consider the fact that 80% of Americans have some form of debt, it becomes pretty clear that the majority of us don’t have the best relationship with money. If you find that one of the main reasons you can’t escape living paycheck to paycheck is due to unnecessary spending, a shift in perspective could help you take steps in the right direction.
Fortunately, a long list of books aiming to shift people’s perspectives on money have been written. We’ve compiled a list of some of our favorite titles on the topic right on our blog – why not take a look?
We’ll share a brief excerpt from a classic personal finance book, Your Money or Your Life by Vicki Robin and Joe Dominguez here to help you get started. This specific excerpt explains why it’s important that we resist spending money without purpose. According to the authors, money is a form of our energy, and what we do with that energy says a lot about us.
“Our life energy is our allotment of time here on earth. When we go to our jobs, we are trading our life energy for money. You could even say that money equals our life energy.
It’s tangible, and it’s finite. It is precious because it is limited… and because our choices about how we use it to express the meaning and purpose of our time here on earth.
Money is something you consider valuable enough to spend easily a quarter of your allotted time here on earth getting, spending, worrying about, fantasizing about, or in some other way reacting to.”
Sometimes it feels like there’ll always be time to make and save more money, and that’s a big reason why many people never take the time to closely evaluate their relationship with it. When you consider the authors’ perspectives, you realize the time you have to make and save money is certainly limited. For this reason alone, it’s wise to reconsider spending it aimlessly.
Start looking at purchases in terms of life energy and the tradeoffs become more real. Your daily lunch expense could seem a lot less appealing when you ask yourself, “Is this really worth X minutes of my life energy, or could it be better spent somewhere else?”
Is debt the reason you’re living paycheck to paycheck?
If debt is the reason you can’t escape living paycheck to paycheck, it’s time to start looking into repayment plans. Repayment plans, just like budgets, are absolutely pivotal to getting you out of your current financial situation. Why?
Repayment plans give you a concrete timeline of when you can expect to be debt-free.
To start your repayment plan, begin by making a list of all of your debts. Whether the debt is from credit cards, student loans, auto loans, mortgages, or personal loans doesn’t matter – all debts that you currently owe payments on should be on this list.
You’ll want this list to be detailed, too – be sure to include the balance owed and interest rates for all of your debts. (This information will be important later, don’t worry.)
There are a variety of debt repayment programs out there, so take some time to look around; for now, we’d like to share two popular options that we think you’ll find simple and effective.
The first is the debt snowball:
Start the debt snowball plan by ordering your debts from the smallest to largest balance. On all debts but the one with the smallest balance, you’ll make the required minimum payments.
On the smallest balance, you put as much money as you possibly can towards it until it’s completely paid off. Once the smallest balance debt has been paid off, you begin tackling the second smallest – so on and so on, until all of your debts are paid in full.
This plan is recommended if you’re looking for quick wins when paying off debt – with the debt snowball, you’ll typically be able to pay off each individual debt quicker than with our next plan. While you’ll save more money on interest with the next plan we’re going to cover, it usually takes longer to pay off each individual debt.
The second is the debt avalanche:
Start your debt avalanche plan by ordering your debts from the highest interest rate to lowest interest rate. Unlike the debt snowball, balances play no role in this plan.
Pay the minimum balance required for all debts except the one with the highest interest rate. For that debt, you’re going to put as much money towards the balance as you can until it’s completely paid off.
After the first debt is paid in full, you move onto the debt with the next highest interest rate – continue this progression until you’re completely debt-free.
These are just two brief examples of common repayment plans, but there’s still plenty more to learn. If you want to know more about debt repayment plans and what the best options are for you, check out our article “Paying Off Debt Using the Debt Snowball”.
Build an emergency fund
When you’re living paycheck to paycheck every month, the thought of saving for anything beyond your immediate needs can seem like a pipe dream. With that said, stashing away as much as you can into an emergency fund – even if it’s a little bit – can make all the difference.
To learn more about emergency funds, why they’re important, and the best ways to start contributing to yours, take a look at our article “How Much Money You Should Save Monthly”.
Thank you for reading – we hope you found this piece valuable and resourceful. There’s no denying that getting out of the cycle of living paycheck to paycheck will be difficult, but the peace of mind you’ll have once you’re free is worth the challenge in itself.