5 Tips to Stop Living Paycheck to Paycheck

living paycheck to paycheck

Do you think about when your next paycheck will come in and what you plan to do with it? Do you suffer from having too much month at the end of your money? Living paycheck to paycheck is a lifestyle that many Americans follow and yet, not many know how to escape the cycle.

According to the Brooklings Institution, one in three, or 38 milllion Americans, are stuck in this endless cycle, and are living paycheck to paycheck. Instead of budgeting correctly, they will budget out what to spend all of their earnings on and then way for the next paycheck. Rinse and repeat.

Many people do not have an emergency fund. When they get into that car accident or a thunderstorm strikes down a tree and it falls onto your property, they do not have enough money to cover the damages and they end up diving deeper into debt. Because of this, the cycle continues where people will use the entirety of their paycheck to pay off their debts and survive.

It’s time to break the living paycheck-to-paycheck cycle. Don’t be a slave to money any longer. Here are some tips to assist you:

Live Below Your Means

The first thing to do is pretend you earn less than you actually do. The first thing that comes to mind would be to set up your direct deposit to only deposit 90% your payroll checks to your main checking account. If you earn $1000 every 2 weeks, this will cut it down to $900 every 2 weeks and condition you to live below your means. Deposit the other 10% into a savings account in a DIFFERENT bank. Having both your checking and savings account in the same bank will give you easy access to clicking the “transfer funds” button and tempt you to use that money.

Deal with living on 90% of your paycheck. You will automatically eat out less and spend less because of this automatic restriction. With that said, this leads us to…

Start an Emergency Fund

If you follow the 90/10 rule discussed above, you will be creating an emergency fund as a product of your direct deposit account setting. Your emergency fund should be able to account for at least 6 months of expenses. This includes rent, utilities, and basic necessities.

Now when you get into that car accident or have that sudden job loss, you can rest a little easier knowing you’ve preemptively built a back-up plan for the next half year.

Create a budget

One of the easiest things to do, but hardest to follow, is to create a monthly budget. It doesn’t have to be detailed but start off with SOMETHING. Something is better than NOTHING. It could be something as simple as this:
August
  • Rent: $500
  • Utilities: $100
  • Cell Phone: $50
  • Everything else: $1150

Remember, this is based on your $900 bi-weekly paycheck., so $1800 per month. And if you followed my steps above, you’ll already have an emergency savings fund set aside.

So start with a basic budget and build upon it as the months go by. In September, your budget may look like this:

September

  • Rent: $500
  • Utilities: 100
  • Cell Phone: $50
  • Loan Payment: $200
  • Eating Out: $100
  • Entertainment: $200
  • Everything Else: $850

Stick to your budget. This will be the one road you walk on from now on.

I recommend using Google Docs so that you can access it on your smartphone when you’re on the go. While you’re eating that Chipotle burrito bowl, update your budget so you don’t forget:

  • Eating Out: $100   |  Chipotle: $9  | Remaining: $91

In additional to Google Docs, many people use YNAB and Mint. Mint is good for keeping track of your spending and auto-budgets your accounts for you. YNAB is a great place to budget next month’s allowances based on last month’s income.

Consider downsizing

Have you ever considered that the apartment you have or the car you drive is a huge vacuum for your money? Consider cheaper alternatives. You may not need a fancy apartment in a city or that nice sports car. Sometimes downsizing is the best solution to free up your budget.

Moving into a smaller apartment might be depressing but it will make your finances happier. This goes along with living below your means. How much is your nice car really costing you? Insurance, gas, and maintenance can add up and over the course of the year, this could equal to a couple months of rent. Consider alternatives that have higher MPG, lower maintenance costs, and lower insurance premiums. If you’re lucky enough to live close to work, consider biking to work when the weather is nice.

Pay down debt

There is no reason on this planet to give your credit card companies free money. Pay down debt as soon as you can and avoid having interest accumulate. Interest does nothing for you. The credit bureaus don’t see it. It’s free money to the companies. The interest you pay on your debt could be a huge factor for those living paycheck-to-paycheck. And interest compounds, fast!

Contribute to Your Retirement

If your work has a 401(k) plan, invest in it. This also goes along with living below your means. Getting a cut in your paycheck by contributing pretax dollars into your retirement is the smartest thing you can do. This could lower your effective tax bracket for the amount contributed and if the company matches your contributions, that’s free money!

In an example, if your company matches 3% of your contributions, that’s an automatic 3% ROI you just received for that year. Where else can you guarantee a 3% ROI?

For most people, the maximum amount they can contribute to their 401(k) is $17,500 per year. I usually try to max this out as fast as possible so it will start generating gains sooner rather than later.

Breaking the Living Paycheck to Paycheck Cycle

If you find yourself on your way to contributing to your retirement after having followed all the other steps, Congratulations, you’ve broken the living paycheck to paycheck cycle.

Invest and Retire Early