Spending less than you make is a lot harder when you live from paycheck to paycheck. The more income you make the more spending. You work hard after all, shouldn’t you spend your money as you wish? Before I had a “financial awakening”, the more I earned, the more i spent. The times I had little money, I managed just fine.
At its core to live paycheck to paycheck means you spend all the money that comes in each month. Instead of putting away some of your income for a rainy day you spend everything as soon as you get it.
I grew up with little money, when I started earning money, I could finally “afford” the stuff i always admired while growing up. I wanted to give our children what my family could not afford to give me when growing up. This is in no way a bad thing, but I ended up in debt. I spent my paycheck as it came in, promising my self that a next one would in a few weeks, the vicious cycle would go on.
On the face of it living paycheck to paycheck seems like it should be hard to do. After all, how difficult is it to put 5-10% of your earnings in a savings account? Sadly i found it be a lot harder than you think. But once i got past the pain the pain of putting money aside, it became a routine.
The percentage of Americans living paycheck to paycheck is 78% . For a lot of them one missed paycheck becomes a crisis. Two missed paychecks can leave them homeless.
Many people agree that money should not be your master, but rather a servant. There are people out there earning small income, but do not live paycheck to paycheck.
If you ever want to get your finances locked down you have to start saving a good chunk of your income. Not just in retirement accounts either.
Today we’ll show you how even high income earners live paycheck to paycheck as well as some easy ways they can start to get out of this risky position.
Why Do People Live Paycheck to Paycheck?
- Nobody starts out in life with the goal of living paycheck to paycheck. For most people earning good money but without real savings or even an emergency fund it just kind of happens.
- If you don’t spend the time to actually plan out your spending and saving it’s very easy to spend everything you make. What’s even worse is how easy it is to spend more than you make.
- Lots of people have good intentions but always manage to find a ‘good’ reason not to save. That’s not everyone of course.
- Many high income earners were only able to get their great jobs because of a good, and costly, education. Almost a third of Millenials report that they live under considerable student loan debt.
- When 10%, 20%, or even 30% of your post tax income goes to paying down your student loans it can be hard to save much of anything.
- When you have assets and savings you will have lot more flexibility than living on their entire paycheck. You can weather small personal and financial difficulties without having to worry about making rent or paying your mortgage for certain period of time.
- To start with they’ll have to set up an emergency fund worth three to six months of expenses. That will give you the flexibility to find the right job if you are laid off or your company folds.
- It also means you will avoid the credit card trap. The worst thing about having no reserves is putting small emergencies on credit cards with no way to pay them off.
- Making the minimums on those debts will cause them to balloon up. A $300 to $500 car repair can end up costing you thousands once it’s on a high interest credit card.
- Once you get over the initial pain of lowering your spending you’ll find having savings lifts a huge weight from your chest. Knowing that you won’t have to drastically change your lifestyle should you lose your job or experience another major event. Some of the biggest benefits include:
- The ability to deal with minor emergencies without going into debt
- Breathing room to look for the best possible job if laid off or fired
- Room for spontaneous spending within reason
- Money to invest should a great opportunity appear on short notice
Those are just the obvious financial benefits. There are tons of emotional, relationship, and mental health benefits as well.
Living paycheck to paycheck is often ranked as the biggest source of stress for the average person. Having just two or three months expenses in savings can lead to a massive improvement in mental health.
- Almost all the downsides to living paycheck to paycheck come back to uncertainty. The uncertainty of what you would do if you lost your job.
- The uncertainty of how you would survive if you suddenly didn’t have more money coming in. For a lot of people just a single month without an income would be disastrous.
- You wouldn’t be able to pay your rent, car payments, or any of their other fixed expenses. If something like that happened to you, you would most likely rely on credit cards.
- Charging the bulk of your living expenses is a slippery slope. You can quickly build up credit card debt that will take years to pay down when you get your finances back in order.
How to Stop Living Paycheck to Paycheck?
There are two ways to stop living paycheck to paycheck. You can either increase your income or cost reduction.
- For the vast majority of people controlling their spending is the best way not to live paycheck to paycheck. You have complete control over what you spend on a daily basis. When you lower your bills, it sets you a good path, even when you start earning a lot of money, you will not be overwhelmed.
- You’d be shocked by how big an impact small choices can make to your finances. Just eating at home instead of eating out one night a week can save you an extra $50 to $100 a month. In this post, you can read extensively about the various ways you can drastically cut your expenses.
- Making small changes to your habits can cut your expenses by hundreds of dollars every month. By putting that money straight into a high interest savings account you can build up an emergency fund rapidly.
Make extra money
I know, I know, saying ‘just make more money’ can sound kind of annoying. Of course making more money would let you live your current lifestyle while still saving money.
If you already like your career or can’t pursue a higher income job for personal reasons it can seem like this one’s out of reach. Thankfully there are more opportunities than ever for secondary income streams and side hustles.
There are tons of different ways you can make extra money in your spare time.
What is the best way to manage your money?
Once you actually start building your savings you have to figure out what to do with your money. The best things you can do is to know right where all your money is going and automate as much of your investing process as possible.
- The biggest thing standing between most people and financial security is lack of knowledge. The majority of people don’t really know what they spend in a month.
- You probably have some idea what your rent and car payment costs but they don’t have any idea what you spend on groceries or eating out. Even worse, you might think you spend a lot less than you actually do.
- Tracking every dollar you spend makes you more aware of where your money goes. You’ll probably be shocked at how much you spend on seemingly inexpensive treats.
- The envelope system is a great way to get started. All you need is a few mailing envelopes and a little time. Write the name of each of your expenses on each envelope. Put the amount of money you’ve budgeted for that expense into it.
- You can spend the money in those envelopes only on the expense written on them. It makes it incredibly intuitive to track your spending down to the dollar.
With the rise of direct deposit it’s never been easier to save. Instead of having to make the conscious choice every month to put money into savings just automate it.
Depending on where you work, you can direct your employer to deposit a portion of your paycheck into a separate account and leave it alone. Once the money’s out of your main account you’ll be surprised at how easy it is to build an emergency fund.
A lot of people want the secret for stretching a dollar. What it really comes down to is living below your means.
If you just landed a big promotion or started a new job, your first instinct is probably to run out and celebrate. It’s natural, after all, you’re making all this extra money so you should pamper yourself a little – this a trap.
Say you’re suddenly making $400 more a month at a new job. You decide to replace your old but still working car with something new and shiny. You drive off the lot with a brand new SUV and a brand new $430 a month car payment.
Suddenly your net $400 a month gain becomes a loss of $30 a month. You’re making more money, but you’re actually under more financial strain than before.
Whatever you do in life, try to live on the budget you had before your last raise. That way you still get to enjoy your success without sacrificing your savings.
To a lot of people happiness involves spending money. Until you get away from this mindset and look at building your financial future as something essential you’ll be doomed to living paycheck to paycheck.
Start by following the basic steps we listed above. They’ll help you lower your spending, increase your income, and finally get a financial safety net set up.