If you were to miss a paycheck from your employer today, would you still be able to cover your financial obligations? The unfortunate reality is that 78% percent of American families wouldn’t be able to because they are living paycheck to paycheck. As far fetched as it may sound, many people are one missed paycheck away from potentially being homeless. And this is scary.
However, the good news is that you don’t have to continue living paycheck to paycheck if you've found yourself in this situation. You can break out of the cycle and get on the road to financial freedom. Learning how to stop living paycheck to paycheck isn’t complicated, but it does take work. Here are five steps you can take to break the cycle.
5 Steps on how to not live paycheck to paycheck
1. Get on a budget
This is one of the most important steps to stop living paycheck to paycheck. The obvious solution to ending the paycheck to paycheck cycle may appear to be making more money...but that's not quite the solution. Although that’s a part of it, it isn’t the first order of business.
Before you can explore ways to make more money, you must first learn how to manage the funds that you currently have. Quite frankly, if you don’t manage what you have now, earning more will only worsen the situation.
The first step in managing your current funds is to get on a budget. Creating a budget gives you visibility to your spending. You can easily see what expenses can be reduced or eliminated so that you aren’t spending beyond your means.
Budgeting doesn't need to be complicated
Your budget simply needs to guide your spending. It should include all of your monthly expenses, which should not exceed your monthly income. Keep in mind, that when it comes to budgeting, it's all about finding the budgeting method or style that works best for you and fits into your lifestyle.
There are several different budgeting methods that exist, and your goal should be to find one that makes managing your money easy.
2. Reduce your expenses
At the crux of our existence as human beings, we really only need four things to survive. We need food, shelter, clothing, and transportation. Anything beyond these four items is a luxury. A great way to determine if an expense is necessary is to ask this simple question: Do I need this to survive?
Even if something falls within those four basic necessities, it doesn’t have to be the most expensive thing. Find cheaper alternatives for your necessities and only purchase what you need. Until you are able to create cash flow in your finances, consider cutting out things like:
- Cable (or find cheaper alternatives to cable)
- Subscription services
- Eating out
- Coffee runs
Cutting things out of your budget doesn’t have to be permanent. You are just making temporary sacrifices buy cutting back on these luxuries. This approach allows you to save and pay down debt so that you can get out of the paycheck to paycheck cycle.
3. Increase your income
Once you’ve established a system and habit for managing your money, it’s time to increase your income. The whole point of increasing your income is to have more cash to save, pay off debt, and ultimately invest. More cash does not mean more spending. Instead, in this case, it means more to work with.
There are several ways that you can increase your income. Things like part-time jobs are great for quick boosts to your earnings, but the ultimate goal is to find a sustainable and consistent way to make more money.
Ways that you can increase your income
- Take on a part-time or seasonal job
- Start a side hustle from home
- Sell unused items from your home and closet
- Negotiate a raise
- Find a higher paying job or career path
You can do one of these suggestions or all of them! It all depends on your creativity and how much time you’re willing to sacrifice.
4. Save up for emergencies
Now that you have extra funds coming into your account, use it as an opportunity to save for emergencies. Having an emergency fund prevents you from getting into more debt to pay for unexpected expenses. With this fund, you are essentially creating a backup plan for yourself.
Ideally, you want to be able to set aside 3 to 12 months worth of expenses for emergencies. However, if you’re just getting started, aiming for at least $1,000 should be your goal. This amount typically covers the small emergencies that tend to come up.
Simply have a few dollars transferred into a high-yield savings account every time you get paid to begin building up your fund. You can also consider automating these transfers. As you free up more cash, put more money into the account so that you can reach your savings goal faster. Remember, it’s an emergency fund. This account should only be used for true emergencies.
5. Eliminate your debt
Much of the strain of living paycheck to paycheck comes from the burden of debt. Many people see the majority of their paycheck go towards paying off a credit card bill, car loan, mortgage, student loan debt, all four, or even more! Getting rid of these debts are critical to ending the paycheck to paycheck cycle. There are several techniques that you can use to pay off debt, but they all have one goal: pay it off quickly!
Tips to start paying off your debt
- Stop creating more debt. You can’t work your way out of a hole if you keep digging it deeper. Cut up the cards and don’t create any more debt.
- List out all of your debts. Write down everything that you owe. Everything.
- Prioritize them based on your debt payoff method. List your debts in the order that you plan to pay them off. This can be based on the debt amount or the interest rate.
- Make extra payments. Use the money that you’ve freed up from reducing expenses and your extra income to pay additional on your highest priority debt. Keep going until it’s paid off then move to the next one.
After you’ve eliminated your debt, use the extra cash to continue adding to your emergency fund and savings. Eventually, you can start to invest so that you can prepare for your long-term financial goals.
Benefits of breaking the paycheck to paycheck cycle
As you start to work on these different ways to break the paycheck to paycheck, consider the benefits.
Your overall stress levels will go down
This directly correlates to the fact that you are not as worried about finances anymore.
You will have more life options because your finances are better
You don't have to stay stuck at a dead-end job and can take more time off. Plus you can save more, invest more, and even give back and help others.
Your quality of life will improve
When your stress is down and you have more options to choose from. The overall quality of your life and how you feel will start to improve.
You can start pursuing your dreams
Because life is meant to be lived and enjoyed and your finances, or lack thereof, shouldn't be the roadblock in the way of the dreams that you have for yourself.
You can break the cycle!
Remember that changing a habit can be difficult, but with the right tools and discipline, getting out of the cycle of living paycheck to paycheck is possible and totally worth it. Apply the principles shared in this post and see how your financial picture changes! Be sure to check out our completely free courses as your work on improving your finances.