Living Paycheck to Paycheck: How To Break the Cycle
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Summary:
Consumers living paycheck to paycheck can find it difficult to scrape together enough extra money to build an emergency fund, save for retirement, or even go on vacation without adding to their current outstanding credit card balances (thereby exacerbating the problem). Living paycheck to paycheck is limiting at best and extremely stressful at worst. Fortunately, there are multiple techniques that can be employed to break the paycheck-to-paycheck cycle and vastly improve American consumers’ financial wellness.
Do you often find yourself paying your bills, buying groceries, and filling your gas tank, only to have almost no extra money left until your next paycheck hits your bank account? Well, you’re not alone.
According to a report by LendingClub Bank, a leading digital marketplace bank, in partnership with PYMNTS, an organization that specializes in global news and analysis in payments, retail, fintech, financial services, and the digital economy, more than half — about 60% — of Americans are living paycheck to paycheck. If you find yourself within this group, the good news is that there are steps you can take to start working your way out of this stressful situation.
Keep reading to learn exactly what living paycheck to paycheck means, as well as how you can end the cycle and start saving money for your future.
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What does it mean to live paycheck to paycheck?
Living paycheck to paycheck” is a term used to describe people who only have enough money to meet their immediate financial obligations, such as mortgage or rent, utilities, groceries, and other essential costs of living. Living paycheck to paycheck essentially means that once your income covers your monthly expenses, you have virtually no money left to put toward savings, investments, and other financial goals for the future.
Sometimes living paycheck to paycheck is due to overspending or a lack of a reasonable budget. Inflationary pressures can also have an impact on how far your dollars will stretch, leaving less and less money for anything other than your immediate needs. Employment issues can be another cause of living paycheck to paycheck, such as if your hours have been reduced or you were laid off and have had to take on a lesser-paying job.
Regardless of the reason, there are a couple of important points to remember. For one thing, the struggle of living paycheck to paycheck happens to people of practically all income levels, so know that you’re not alone in this situation. In addition, remember that this problem is not unsurmountable, but it will require some discipline to get through, says James Allen, a CPA, CFP, CFEI, and founder of BillPin.com.
“Breaking free from the paycheck-to-paycheck cycle is like untangling a ball of yarn. It’s a process that requires patience, strategy, and a keen understanding of your own financial habits.”
How to break free from the paycheck-to-paycheck cycle
If you want to stop living paycheck to paycheck, you need to commit to making some changes in your lifestyle, your spending habits, and your overall relationship with money. Here are a few strategies you can employ to start breaking out of the paycheck-to-paycheck cycle:
Create a budget — and stick to it
If you’ve never created a budget or managed to stick to one, now is the time to start. If you don’t have a budget, you probably only have a vague idea of where your money is going. Oftentimes, just seeing where your income is being spent can make a world of difference in breaking the paycheck-to-paycheck pattern.
“Creating a budget is like building a financial roadmap. It’s about knowing where you’re starting, where you want to go, and how you’re going to get there. The key is to make it realistic and flexible. It’s like planning a road trip. You wouldn’t set out without a map, and you’d also allow for detours along the way,” says Allen.
Start by evaluating a month’s worth of expenditures against your income, both fixed and variable — including exactly how much you’re spending on non-essential additional expenses, like eating out or shopping. You can use bank statements or credit card bills to help you figure this out; just make sure you account for every penny.
Next, you can work out how much money you need for your essential living expenses and see what you have left over to cover your debts, savings goals, and discretionary expenses.
One useful strategy is to incorporate the 50/30/20 rule into your budget. Popularized by U.S. Senator Elizabeth Warren, this budgeting system states that about 50% of your net monthly income should be allocated toward necessary living expenses, 20% should be put toward savings and paying off debts, and 30% is for discretionary spending (i.e., anything you want!).
Curb your spending habits
Once you create a budget, you’ll probably notice areas where you spend more money than you think you do. If you’re constantly dining out, going on vacation, buying the latest cell phone model, or shopping till you drop, you may be spending more than half of what you make on extravagances. In other words, you’re probably living paycheck to paycheck unnecessarily.
That’s not to say you can never have any fun, but if you find that you’ve run out of money before your next paycheck has dropped or that your already outstanding credit card balances are getting even higher, you might want to think about cutting back a bit.
For example, you can cook a nice dinner at home for a fraction of what you would pay for the same meal in a restaurant. You can change up your wardrobe by trading clothes with a friend who wears the same size. If you need a vacation, save the money you would spend on plane tickets by choosing a destination you can drive to — or better yet, enjoying a staycation. And if your cell phone still works fine, continue to use it for another year instead of trading it in for the latest model (and starting your monthly mobile device payments all over again). Overall, remember that small changes over time can have a big impact on your financial future.
Pro Tip
Sometimes it’s a little too easy to slap down a credit or debit card when making a purchase. To help curb your spending, try leaving the plastic at home and paying for your expenses with cash. Statistically, people tend to spend less when they need to part with “real money.”
Evaluate your monthly bills
While you can’t get out of paying for basic living expenses, you may be able to lower some of your bills, thereby freeing up some cash for other uses. One idea is to adjust your thermostat up or down depending on the season — a few degrees either way can make a significant difference in your energy bills.
You may also want to take stock of your active streaming service accounts. Maybe you’ve been paying for four different streaming apps every month, but since the last seasons of your favorite shows ended, you’ve stopped using two of them altogether. Consider dropping the streaming services you aren’t currently using — and watch the balance in your checking account grow as a result.
Another option to reduce your necessary expenses is to search for better rates on car insurance. Most people tend to stick with the same auto insurance they got when they bought their car, but it certainly doesn’t hurt to shop around a little to see if you can find a better deal. Also be aware that you might get a better deal by bundling your insurance policies (such as car and home insurance) than you would if you split your policies between two different insurance companies.
Build an emergency fund
Unsurprisingly, people who live paycheck to paycheck often have very little money in their savings accounts. As you strive to get your finances in order, you should make it a top priority to create an emergency fund.
Think of an emergency fund as a safety net: if you suddenly lose your job, incur unexpected medical bills, or need to replace a broken appliance in your house, you’ll be glad to have some extra money in the bank to fall back on. Having a designated fund for emergencies can keep you from needing to borrow money from friends or family — or worse, racking up even more credit card debt that you can’t afford.
Pro Tip
Learn to use any windfalls you receive in more strategic ways. For example, instead of using your tax refund or annual bonus to buy some expensive new clothes or fancy electronic devices, put that money toward your emergency fund, use it to pay off a credit card balance, or put it in a Roth IRA.
Pay down your debts
“The #1 piece of advice I can give is to put as much of your efforts as possible into both reducing and paying off your existing debt,” says Ian Wright, director at Business Financing. “This is often something I see when people start to earn more money and lifestyle creep sets in, meaning that they’re actually not in any better of a financial situation due to their debts rising at the same rate as their income.”
Like Wright, most personal finance experts agree that paying down consumer debt, such as credit card debt, should be a priority. You can start by not carrying credit cards in your wallet so the temptation to use them isn’t an issue. You should also make an effort to pay them down as quickly as you can. In most cases, consolidating your high-cost debts into a single loan will save you money on interest rates and lower your monthly payments.
“One thing I have noticed with my clients who live paycheck to paycheck is the fact that they actually make enough money to live a very comfortable life. However, a huge chunk of their money tends to go toward high-interest debt payments that they got into,” says Young Pham, a financial advisor and investment analyst at BizReport. “So my main advice to them is often this: prioritize paying off any high-interest debt that you have, even if it means downsizing a little or tightening your belt. When you get rid of bad debt, you are more likely to find yourself with a bit of extra money each month to save for a rainy day.”
Once you’ve tackled your credit card debts, it’s time to focus on other money you owe, such as auto loans, personal loans, or student loan debt. Paying off your debts can be difficult, as it involves making some sacrifices, but it will bring you that much closer to financial freedom.
Pro Tip
“Consumers across the income spectrum carry massive credit card balances, and with interest rates for debt growing, outstanding debt balances could equal all paycheck-to-paycheck consumers’ savings balances in the next five years. For consumers looking to decrease their overall debt burden, now is a good time to consider consolidating and/or refinancing that debt into an installment loan.” — Anuj Nayer, financial health officer at LendingClub Bank
Increase your income
If you’ve tightened your belt as much as possible but still find you aren’t bringing in enough money to set aside saving or cover unexpected expenses, you might want to consider options to increase your household income. Here are a few suggestions to get you started:
- Drive for a rideshare service like Uber or Lyft.
- If you like kids, consider working as a babysitter. Some parents will pay above minimum wage for babysitting services.
- Use your existing skills to pick up some freelance work online.
- Earn some extra cash by walking your neighbors’ dogs.
- Do the grocery shopping for people who don’t have time to do it themselves.
- Help the elderly. As the adult population ages, they might pay to have a little help around the house or to have someone run errands for them a few days a week.
Getting a second job or a side hustle may not be your favorite option to break free of the paycheck-to-paycheck cycle, but it could be one of the fastest ways to get out from under your debts and start living a life of financial freedom. And as an added bonus, like many others before you, you may just find that your temporary side gig turns into a lucrative, full-time opportunity!
Tips for saving money strategically
When you’re living paycheck to paycheck, it can feel like you have no money left over to start saving, but keep in mind that every little bit helps. The sooner you start, the faster you can watch your nest egg grow.
Use autopay to pay yourself first
You may already use autopay to pay some of your bills every month with recurring transfers from your checking account. In a similar vein, you can have money automatically deducted from your paycheck and deposited directly into your savings account. Even $10 per pay period is a good place to start. If you get paid twice a month, you’ll have an extra $240 set aside after one year.
Round-up apps
Apps that round up your everyday transactions have grown in popularity in recent years and can be a great way to start saving or investing your “spare change.” Simply link the app to your debit card, then every time you make a purchase, any extra money rounded up to the next dollar is deposited into your new account. For example, if you buy groceries totaling $72.15, the app will round up your transaction and add $0.85 to your savings account. This money adds up quickly, and the best part is that you won’t even notice it’s missing!
There are many round-up apps on the market right now: Acorns is a good one for investing, while Chime is geared more toward savings. Neither app has a minimum balance to open an account, and both come with a free debit card. However, you may want to consider foregoing the debit card so you’re not tempted to dip into your extra funds!
Save your real change too
Round-up apps are often referred to as “virtual change jars,” but what about your actual change jar? Is it just sitting around gathering dust? Add to it whenever you pay for something in cash, and periodically deposit that money into your savings account. You’d be surprised at how fast it accumulates!
Key Takeaways
- Living paycheck to paycheck means that stagnant wages, the rising cost of goods and services, and poor money management can make it difficult to save money, plan for retirement, or reach other financial objectives.
- More than half of Americans live paycheck to paycheck, but there are multiple ways to get out of the paycheck-to-paycheck cycle — as long as you’re willing to make some sacrifices.
- Americans living paycheck to paycheck should try to reduce their bills, avoid overspending or taking on new debt, pay down their existing credit card debt, and think about taking on a second job or side gig to bring in additional income.
- An emergency fund is an important financial tool that can help to guard against job loss, emergencies, and other unexpected costs, so be sure to prioritize building up yours!
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