Nearly 63% of Americans say they are living paycheck to paycheck. That means more than half of the US population are just barely able to cover their monthly expenses without the capacity to set aside money for savings or even build an emergency fund for when something will inevitably go wrong. That also means that 63% of the population cannot afford to lose their jobs without a new one waiting for them.
Although many would agree that having a financial cushion is important. It’s all the more important in times when the economy takes a negative turn and unemployment rises. If you are unable to set aside savings if you currently have a steady, full-time job then it will be nearly impossible when the job market and economy are not favourable.
A myth that people like to tell themselves is that living paycheck to paycheck is permanent or what everyone does, the fact is that it’s not impossible. It takes a bit of effort and discipline but anyone can turn their situation around and improve their personal finances. To show you how this can be done we have listed out the top 14 steps to stop living paycheck to paycheck.
1. Stick to a budget
To stop living paycheck to paycheck it is important that you begin to build new habits of discipline. This starts with creating a budget. (We have a full article on budgeting for beginners here.) Starting a budget means first committing to changing your habits and embracing new ones that will help you support your financial goals. Deciding to quit living paycheck to paycheck is a financial goal and one that requires taking multiple steps to achieve.
Like all financial goals, having a budget is the foundation. When you come up with a budget, you gain understanding of where your money goes and you then have the ability to direct your understanding towards actionable steps that will support your goals. When you budget, you are prioritizing your finances and you can better meet your needs and objectives.
Creating a budget is one thing but sticking to it is another entirely. That is why it is very important that you change your mindset about how you are tackling your finances. Putting a focus on your finances and being intentional with every dollar, will help develop a mindset geared towards your financial goals and make budgeting, savings, and creating multiple income streams a lot easier and more productive.
2. Track your expenses
If you are living paycheck to paycheck and have no idea how much you spend your money on your different expense categories, that’s likely where your biggest error is. When you are barely getting by, it is imperative that you understand and account for every dollar that goes out of your pocket each time you pay for something. Only then will you be able to determine whether or not you have a spending problem or an income problem (as in not earning enough income).
It is important that you track your expenses because it’s a necessary step in creating a budget. It also makes you think about what you’re spending your money on. Is the item a want or a need?
3. Cut your expenses
If you’ve tracked your spending and created a budget. It’s time to look at your expenses and start scrutinising them to pinpoint the areas where you need to spend money and areas where you’re spending money that can be reduced (‘wants’ vs ‘needs’).
In a budget your expenses will be categorized as either fixed and variable expenses. Fixed expenses include items like rent or mortgage, loan repayments and utility bills. No matter what activities you do, you will have to pay them every month.
Variable expenses on the other hand are those that change from month to month even if you incur them every month, such as groceries and transportation. Most other expenses are wants that you may or may not incur every month, such as eating out, entertainment, gifts, etc.
Most people have a spending problem, and it’s important to go over your expenses and reduce or eliminate the expenses that are merely ‘wants’ and are not ‘needs’. Things such as gym memberships, streaming service subscriptions, brand new phones, clothes, etc. Likely you’ll be able to work and live with what you already have as opposed to purchasing more ‘wants’.
4. Live a minimalist lifestyle
Scrutinising ‘wants’ and reducing expenses to free up money in your monthly budget is a great achievement but there is another step that can be taken which is adopting a minimalist lifestyle. This involves buying and keeping only what you need and use, and selling or donating everything else. Those who practise minimalism put effort into not accumulating a lot of things and instead take joy and contentment in experiences and relationships and the things they already have.
If you truly want to stop living paycheck to paycheck, consider adopting a minimalist lifestyle. Start by decluttering your stuff and keep only the items that you need. You may find you have too much house and can move to a smaller place, thereby freeing up rent or mortgage spending and also potentially finding thousands of dollars from just the items just lying around your home. When you begin to focus your energy only on things that are essential in order to live day to day, instead of the latest and greatest gadget or item, your desire to spend money on unnecessary things reduces.
5. Pay yourself first
Paying yourself first does not mean that you reward yourself by buying stuff that you desire. It means that you invest in yourself – through savings or investing. It is a way of securing your future so you avoid the scenario of having to live paycheck to paycheck. When you pay yourself first, you are prioritising yourself and focusing on saving money for your future needs or emergencies by building a financial cushion.
It means that you set aside a designated savings amount each paycheck, before any bills are paid or money is spent. This then forces you to live off the remaining amount and if you’ve completed a budget, then your savings should be built into the budget. It’s best if you’re able to have your savings automatically withdrawn into a separate account each time you’re paid.
6. Build your emergency savings
An emergency fund should consist of anywhere from 3 to 6 months of your monthly living expenses. This is to be used in case of the loss of employment, personal and family emergencies, or other emergency needs that arise (such as vehicle repairs, medical bills, etc.).
Similar to how you now pay yourself first when you receive your paycheck, a specified amount of those savings should first be towards an emergency fund. When you have completed saving and have a fully funded emergency fund, then focusing on investing and retirement is the next step.
7. Contribute money towards your retirement
The future is uncertain and you do not know if you may be forced into retirement. While this tip may not seem like it’s helping you to stop living paycheck to paycheck, you’re correct if you’re looking at your finances today. But if you look to the future when you want to retire, you don’t want to rely solely on Social Security and be worried about what you may receive.
Think of saving and investing for retirement as a way to prevent your future self from having to live paycheck to paycheck. To get started, be sure to take advantage of your employer matched 401k retirement account if they offer matching, if not, consider a Roth IRA. Living paycheck to paycheck is difficult enough while you’re working, the last thing you want to do is spend your golden years waiting on your Social Security check to survive.
8. Get out of debt
One of the best steps to take to stop living paycheck to paycheck is to build a plan to tackle debt. For a lot of people, the reason why they don’t seem to have enough each month is because of the amount of debt they have, and the associated payments. So having a plan in place to eliminate debt can significantly free up money in your paycheck. There are two main ways to tackle debt:
The Debt Avalanche Method focuses on paying the debt with the highest interest rate first. So every month that you make extra payments towards that debt until it’s completely paid off, then move to the next highest debt.
The Debt Snowball Method on the other hand, is paying the smallest debt first (by balance) and when it is paid off, you use the money you used to pay off that debt towards the next smallest debt.
9. Start earning on the side
If you are just able to only cover your ‘needs’ with your salary even with a budget, that means you have an income problem. This means you need to find a way of increasing your income as there is only so much that can be saved from a spending and expense perspective.
There are a number of side hustles that can be utilised to earn more income. From online jobs, passive income, self employed jobs, business ideas to becoming an Uber driver. All it takes is a little creativity and effort to starting earning an income on the side.
10. Invest in yourself
In keeping with increasing your income, it’s important to invest in your personal and professional development, so that you continue to make yourself as valuable as possible in whatever profession you’re in. That means you are giving yourself an opportunity to grow and reach your full potential thereby increasing the potential salary that you earn.
At its core, investing in yourself will have a direct impact in the quality of the life that you are living in the present and what it is going to be in the future. It is also helpful as regardless of how the job market looks, there will always be an opportunity for you.
11. Learn from your mistakes
Most of the financial mistakes that people make is due to lack of understanding, because they simply don’t know better. Sometimes, it takes the experience of a difficult phase in life in order to learn and to make better financial decisions. The important thing is to be intentional and learn from those mistakes and commit to continual growth and not blaming mistakes on circumstances or others.
12. Have a financial plan
Having a plan means having a clear and focused direction of where you want to go and what you want to achieve in terms of your finances. In addition to the overall direction of where you want to go, it’s important to have a measurable and detailed plan on how you’re going to get there.
Although coming up with a detailed plan can be a challenge at first and may take you several revisions because your priorities and objectives could change – it’s important to have a plan all the same.
13. Focus on the big picture
Deciding to stop living paycheck to paycheck and beginning to focus on the habit changes that need to take place in order to achieve a surplus in your paycheck will require sacrifice and a lifestyle change. There will be a lot of adjustments and it will be difficult at first but staying focused on the big picture can help. The temporary inconveniences, although uncomfortable, pail in comparison to the feeling of financial stability and the sense of accomplishment from achieving your financial goals.
14. Stay motivated and consistent with your progress
To stop living paycheck to paycheck requires numerous steps and small adjustments along the way. Be sure to celebrate your wins along the way, like when you save your first $100, fully-fund your emergency account, are finally able to contribute towards your retirement account, or even getting your first paycheck from your side hustle.
You need to celebrate these things as it will be tough to stay motivated at times. Because nobody else will keep you motivated, or know the sacrifices you have taken to start pursuing and achieving your goals. Staying motivated will also help sustain the momentum of your progress.
Be consistent with your actions. Small consistent steps are always better than big inconsistent ones. By staying consistent, you develop good spending habits that will serve as your foundation when you aim for bigger financial goals in the future.
The Bottom Line
Although living paycheck to paycheck is a reality for most people, it does not mean that it needs to be a reality for you. Developing healthy financial habits and financial discipline is key to get yourself out of the paycheck to paycheck cycle.
Not having to wait for your next paycheck impatiently might seem like a distant reality for now but nothing will change unless you decide start taking the steps outlined in this article. Some may seem daunting at first, but the important thing is to take one step at a time, stay consistent and be confident in the decisions you make.
Additional Articles That May Interest You:
- 10 Essential Budgeting Categories to Create a Successful Budget
- How To Stop Spending Money: 18 Key Strategies
- Budget 50 30 20: An Easy Budget Method
- Budgeting 101: How to Budget Money
- Zero Based Budgeting in 4 Easy to Follow Steps
- What is a Sinking Fund? 5 Essential Reasons You Need One
- How Much Should I have Saved by 30, 40, 50, 60?
- The Debt Avalanche Method Fully Explained
- The Debt Snowball Method Fully Explained
- A Guide to Minimalism as a Lifestyle
- How Much Emergency Fund Do You Need?
- 7 Effective Strategies to Pay Off Debt
- How to Confidently Retire With Real Estate: 5 Practical Steps
- Complete Guide: How To Buy A House In 7 Easy To Follow Steps
- Strategies To Becoming Completely Debt Free