Many individuals find themselves caught in a cycle of living from paycheck to paycheck, a stressful routine that leaves little room for savings or debt reduction. Based on a CNBC report, 63% of Americans have become reliant on this cycle since the COVID-19 pandemic hit. However, with vaccinations rolling out and additional stimulus packages being passed, there’s a positive shift in the economy. This could be the opportune time for you to stop living paycheck to paycheck. Let me share some easy steps to help you break this cycle, even when funds are tight. But first, let’s define what it means.
The term ‘living paycheck to paycheck’ generally implies a scenario where your entire income is exhausted to meet monthly living costs, leaving you with little or no savings or resources to pay off debts. If an unexpected expense arises, ideally, you would need money stashed to cover it.
Towards the month-end, you might find your bank balance going dangerously low as you anxiously await your next paycheck. This could lead you to accrue debt in the form of credit cards or high-interest payday loans, perpetuating a vicious cycle. Often referred to as the ‘rat race’, it gives you a feeling of being trapped, forced to work just to meet your basic necessities.
Here are some simple steps to help you break that cycle.
The real key to breaking the cycle is to get one month ahead financially. Rather than allowing your paycheck to dictate your spending cadence, calculate your monthly expenses in advance. Then, work to save that sum upfront. The income earned in the current month would then be used for the next month’s expenses. Let’s look at two examples to elucidate this.
Scenario A: Suzie is living paycheck to paycheck. She earns to pay her bills which amount to $3,200 per month. Towards month-end, having exhausted most of her income, Suzie anxiously awaits her next paycheck, cutting back on her spending severely.
Scenario B: Suzie has enough savings to cover her monthly expenses. In May, she saves $3,200 which she uses in June. The income she earns in June is saved for July’s expenses.
The stark difference here is that, unlike Scenario A, Suzie isn’t anxiously awaiting her next paycheck. Moreover, if any unexpected mishappenings occur, her budget for the current month remains unaffected, allowing her to plan withdrawals from savings or organize additional income.
Meanwhile, Suzie manages to save a specific amount each month, becoming more financially secure. If you’re prepared to strategize like Suzie, here are five steps to cease living paycheck to paycheck this year.
1. Budget & Calculate Monthly Expenses: Begin with understanding your monthly expenses. Identify what you need to live comfortably for 30 days, examining previous bank transactions, or using an app like Mint.
2. Limit Luxury Spending: Temporarily cut back on discretionary expenses to save one month’s expenses.
3. Pay Off Debt: If high debt is your biggest concern, focus on paying that off first. Your monthly expense will decrease substantially, making it easier to save.
4. Increase Earnings: Earning extra income can help break the paycheck to paycheck cycle faster. Consider selling unused items, freelancing, or even small jobs like food delivery.
5. Live Below Your Means: Once you’re comfortable with your budgeting and earnings, commit to spending less than what you earn. Using the surplus funds wisely for savings, investments, or debt payments, can help you build wealth and break free from financial constraints.
