80% of Americans are struggling to find a way to stop living paycheck to paycheck. Are you one of them?
Struggling to make ends meet, worrying about upcoming expenses, and living a life of financial fear?
How do you break the cycle of living paycheck to paycheck? If you’re here looking for a magic bullet, I’m sorry to say it doesn’t exist.
What does exist is a series of steps and milestones that will help you climb out of the financial hole that you’re finding yourself in.
I know this from experience. There was a time we were crushed with over $100,000 of debt, and over-drafting our bank account was as common as the sun rising from the east.
It was our life, and we assumed we were normal and would be stuck in this cycle forever.
Through much trial and error and many years of mental pain…we did it. We learned how to stop living paycheck to paycheck, and you can too!
Start A Budget
There isn’t anything sexy about creating a budget… They just aren’t “fun”. What a budget lacks in sexiness, it quickly makes up for in functionality and importance.
Without a budget or financial plan… you’re blindly hoping your money goes where it’s needed and hoping that there’s some left over at the end of the month to tuck away in a savings account.
A plan built on a foundation of hope rarely succeeds… because hope isn’t a strategy.
Your plan to stop living paycheck to paycheck should be built on a strong foundation, and a budget is exactly the foundation you need to build off of to get out of the paycheck to paycheck purgatory you’re currently in.
So, How Do I Start A Budget?
Starting a budget is really easy. There are tons of apps that will help you along the way, and anyone new to budgeting should start by using an app to create and track their budget.
But, before you download an app, you should know what bills you currently have. Grab a pen, some paper, and write down the due dates, minimum payment, and interest rate for each bill.
Once you have your bills jotted down, take a look back at your recent month of spending and get an estimate of how much you’re paying for your life necessities. If you have time, look back at the previous 3 months of spending.
This can be done easily with most online bank accounts. Simply export your monthly statements to excel, add a filter to the top row, and sort your spending by category.
Write down how much you spent on food, gas, and dinners out.
After you have your numbers, download a budgeting app that works with your cell phone. I would suggest the following:
As you can see, there are many to choose from. Each app has it’s own pros and cons, and I would recommend Mint. Mint is created by Intuit (the folks who make Turbotax and Quickbooks).
It has tons of features to help you manage and track your spending, and it’s been around forever. Which in the world of technology… means a lot!
Take a look at all of the apps and see which one works best for your life. After all, the long-term use of the budgeting app is really what’s important.
Slow Your Spending Down
It’s a fact that a car will burn less gas if you’re not driving like a madman, or driving at all. The same can be said for your spending habits.
If you slow down how much you’re spending, you’ll naturally have more money left at the end of the month.
Sadly, it’s not always that easy… but, you probably can slow the ol’ spending train down a bit each month.
Look at some common money leaks that are slowly robbing you blind. Things like gym memberships, monthly subscription services, entertainment spending, and unplanned shopping trips.
One of our biggest money leaks was as simple as frequent trips to the local dollar store. It sounds insane, right? Well… to start, nothing cost a dollar at the dollar store. Total sham.
Also, the dollar store is great for small, unplanned trips. $20 here, $15 there… pretty soon you’re spending $150-$200 a month without even noticing.
Spending $20 stings a lot less than $200, but at the end of the month, it adds up to that nasty $200 you would have easily walked away from initially.
One of the best ways to slow your spending is to complete a no spend challenge. Freeze your spending, and plug those money leaks!
Easy Ways to Slow Your Spending:
- Only make one, well planned grocery trip per week. Anything not on the list has to wait until next week.
- Only make big purchases after waiting 48 hours
- Cancel all monthly subscriptions
- Start working out at home
- Cancel cable (gasp)
- Cancel your internet and utilize your phone hotspot (gasssppp)
- Cut back on eating at restaurants. (gaaaaassssppppp)
- Complete a financial fasting challenge
- Stop shopping at the big box stores
Track Your Spending
If you’re serious about learning how to stop living paycheck to paycheck, you have to keep an eye on your spending.
“Money is like a toddler at a toy store. If you turn your back on it for a second, it’s climbing the shelves and screaming at the ceiling for no reason.”
You. Have. To. Pay. Attention. To. Your. Money!
If you aren’t watching your spending habits, you’ll quickly slip back into those poor habits that led you here in the first place.
The simple act of monitoring your spending every day will hold you to a level of accountability that you didn’t know you were capable of operating under.
You won’t feel restricted, you’ll feel rejuvenated by the amount of extra money you have left over each month.
Some of the budgeting apps will do this for you, but I would argue that you should manually enter your spending. Personally, this helped me drastically change my spending habits.
Automation is good for a lot of things in the finance world, but I don’t think it’s appropriate here. You need to get your hands dirty with this budget, and stay involved in it daily.
Build the habits now. They will be your foundation.
Stop Accruing Debt
To stop living paycheck to paycheck, you have to stop the financial bleeding. Taking on new debt shouldn’t be an option any longer.
This is obviously easier said than done, but it’s important.
If you’re trying to keep up with the Joneses, you’ll always find yourself tied to monthly payments. Those monthly payments won’t ever allow you to stop living paycheck to paycheck.
A few tips to help you stop accruing debt:
- Buy vehicles in cash that are valued at only 10% of your gross income
- Cut up your credit cards and use cash ONLY
- Stop upgrading your cell phone every year or two
- Create a sinking fund for each upcoming expense
- Wait 48-72 hours before making any new purchases that aren’t necessities
Taking on new debt will seriously compromise your ability to stop living paycheck to paycheck.
Experian data shows that the average new car payment jumped to $530 a month, and the average used car payment climbed to $381 a month.
That’s an incredible amount of money to pay every month for a vehicle… Let’s see what that money COULD do for you.
Investing $530 a month for 5 years in the S&P 500 (9% average annual return) could grow to $38,062.76.
According to CarFax, your new vehicle will depreciate 20% in the first year, and then 10% annually for the next 4 years. Your new ride is depreciating rapidly!
You could potentially have $38,000 or a vehicle worth 60% less than what you paid for it. This is all accomplished with the same $530 a month. Whoa…
Related: Sinking Funds: What, Why, How
You simply can’t take on additional debt and monthly payments if you really want to stop living paycheck to paycheck. It’s a deal breaker.
Pay Off Debt
Debt sucks. It’s a self-imposed financial anchor on your speedboat. The worst part about debt, is that you get used to those monthly payments. They just become a part of your life and you can’t imagine life without them.
I don’t know how many times I’ve heard “you’ll always have a car payment” or “leasing is the least expensive way to pay for a car”.
For some reason it’s easier to learn how to make monthly payments than it is to avoid them.
We easily accommodate monthly expenses and it’s a financial travesty.
A 2018 Retirement Survey found that 42% of Americans say they’ll begin saving for retirement if they become debt free. The same survey also found that 29% of Americans believe they’ll never get out of debt.
If you don’t believe you can stop living paycheck to paycheck, add up all of your monthly debt payments. That sum of money will be yours to save and invest once you’re debt free.
For us, it was almost $1,800 a month! What’s your number?
Debt Pay Off Methods
What’s the right way to pay off debt? The good news is there isn’t a right way to attack debt. Despite what the financial gurus want to sell you, there isn’t a perfect cookie cutter plan.
There are a few options though, and options are good.
- List all debts in order of balance (low to high)
- Pay minimum payments on all debts besides the lowest balance
- Pay extra on the debt with the smallest balance
- Pay off the debt with the lowest balance and roll the payment into the next debt on the list
- Continue until debt free
- List all debts in order of interest rate (high to low)
- Pay minimum payments on all debts besides the highest interest rate
- Pay extra on the debt with the highest interest rate
- Pay off the debt with the highest interest rate and roll the payment into the next debt on the list
- Continue until debt free
The debt snowball method is all about emotional wins! By attacking your debts with the smallest balances you’ll get the satisfaction of paying off debt and feeling the wins.
Those emotional wins will help keep you motivated on what could possibly be a long and tedious financial journey.
The debt avalanche method is all about the financial wins. By attacking your highest interest rates, you’ll save money as you pound away at debt. Before jumping in, consider your balances as well.
If you’re debt withthe highest interest rate is also your debt with the highest balance, you might not get an emotional win for a long… long time.
Can you manage that? If not, consider creating your own debt stacking plan.
You can begin by attacking a few low balance accounts to get that booster shot of motivation and then attack your highest interest rate.
No matter which method you choose, remember the finish line is the goal.
Make Saving Automatic
How are you planning your savings each month? Are you waiting to save what’s left over and then manually transferring the money to your savings account?
If so, I would venture to say you’re not saving a whole lot. If you’re trying to save money, you should consider setting up an automatic savings transfer to occur each pay day.
Consider it a self-imposed savings tax, and it’s going to be automatically deducted from each pay check… similar to taxes!
If you don’t think this is possible, consider how you’d handle a federal tax increase.
What would you do if the government decided to increase your taxes 2-5%?
You’d moan about it, right? I know I would… but, ultimately you’d figure out how to make it work and acclimate to a new lifestyle.
If you’re willing to accommodate Uncle Sam in your life, why not make the same considerations and sacrifices to stop living paycheck to paycheck?
Impose a savings tax on yourself and automatically transfer the money each pay period to your savings account.
How To Set Up An Automatic Savings Account
Setting up an automatic savings plan isn’t difficult. First, you’ll need to establish a savings account. This can be completed at a brick and mortar bank or an online bank.
Personally, I’m really drawn to the high interest online savings accounts that exist. If you’re not receiving 2% on your savings, you’re leaving some money on the table!
Another huge perk to an online savings account is that you won’t be able to access it as easily as a savings account linked directly to your checking account.
This will prevent you from dipping into your nest egg and making unnecessary purchases. Most online savings accounts complete transfers in 24 to 48 hours.
This will force you to pause and consider the purchase.
Most online savings accounts complete transfers in 24 to 48 hours. This will force you to pause and consider the purchase.
After you have your savings account set up, you’ll need to request a direct deposit from your employer.
The money will then be automatically sent to your savings account and you won’t have to do a thing!
Another option is to set up an automatic transfer from your checking account. If you’re not able to set up a direct deposit, this is the next best option.
Most banks will allow you to quickly complete this transaction and decide how much you want to transfer each month.
If you’re able to have it occur on payday, that’s even better. The less time the money sits in your checking account, the better!
Save Your Raise
In 2018, the average annual salary increase was around 3%. The desire to increase your lifestyle by 3% must be thwarted.
That salary increase should be automatically saved/invested/utilized and not added to lifestyle inflation. There are a few ways to do this…
- Increase your retirement contributions to match your pay increase
- Increase your post tax savings
- Add to your monthly debt payment total
Your personal finance journey is yours and yours alone. Where will that additional 3% make the greatest impact to help you stop living paycheck to paycheck?
If it’s debt freedom, then increase your debt payments by 3%. If you’re debt free and building wealth, add it to your retirement accounts or post tax investments.
The process to improve your life has to start somewhere. 3% this year, 3% next year, and so on… your financial success begin to compound over time.
Breaking the paycheck to paycheck lifestyle takes time, and saving your raise is an effective way to utilize both time and money.
A Bonus Isn’t A Plan
Does your company offer bonuses? If so, you shouldn’t count on getting that bonus. Even if the bonus has been regular for years, your company can quickly decide to stop giving them out and derail your financial plans.
Your financial plan should only include your guaranteed salary. By only relying on your guaranteed salary, you’ll avoid the potential need to break out your credit cards to cover expenses that were supposed to be covered by your bonus.
If and when that bonus does come, you can make the best use of this based on your financial needs at that time.
How to intelligently use your bonus:
- Pay off consumer debt
- Pad your emergency fund
- Invest in your retirement account or post tax brokerage account
- Add to your sinking funds
A happy financial surprise is always welcome, and you should set yourself up for these happy surprises. Don’t place yourself in a “now what do we do” scenario.
You’re ultimate goal is to stop living paycheck to paycheck, and that’s an amazing goal. But, what are the goals you’ll set along the way to help keep yourself motivated?
Goals will make your financial journey enjoyable. After all, who doesn’t love completing a goal or celebrating victories?
Without goals, the process to stop living paycheck to paycheck becomes tedious and mentally exhausting.
When you’re mentally exhausted or bored, you’ll be at risk of making unnecessary purchases because they give you a nice shot of dopamine.
Goals prevent this and allow you to experience success along the way. When you create goals, they should be SMART goals.
If you work in corporate America, I’m sure your eyes just rolled! But SMART goals have a place in your personal finance tool box.
A SMART goal is:
- Time Bound
An example would be, “I’ll pay $500 off my MasterCard balance by April 1”. Even if your MasterCard has a balance of $5,000, the goal to pay $500 will help you experience small steps of success along the way to paying off the total balance.
There isn’t a limit to the goals you set. Create intelligent goals that help keep you motivated and disciplined while you work to stop living paycheck to paycheck.
Last, but probably most important, is patience. Financial progress tends to be slow and at times tedious. But, progress is still progress no matter how slow it appears.
Learn to be patient. I’ve learned that time is going to pass regardless of what you’re doing. If you’re working hard to stop living paycheck to paycheck, you’ll be pleasantly surprised at your progress in a year or two.
The same time will pass no matter what. Use it wisely and don’t look back and wish you would have started this process in 5 years.
The decisions you make will begin to compound on themselves and your progress will speed up over time, but you have to start and you have to make peace with what may feel like slow progress.
Stop Living Paycheck To Paycheck: Final Word
Well, that’s it. Easy enough right? Ok, I’m obviously kidding. Breaking the cycle of living paycheck to paycheck takes discipline, time, and a well-stocked financial toolbox.
No matter what tools you choose to add to your toolbox, keep moving forward. Keep taking steps toward your goal to stop living paycheck to paycheck.
You’ll reach the finish line, and your future self will thank you for starting and maintaining the discipline and motivation to press forward.
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