6 Steps to Breaking the Paycheck to Paycheck Lifestyle
Breaking the habits of a paycheck to paycheck lifestyle is not an easy task to do but, it is possible. Some people inherit these spending habits from their surroundings or upbringing because that’s how their parents lived. It doesn’t matter whether you’re making 20k per year or 200k you can still fall into the paycheck to paycheck lifestyle.
Here are some steps to break this habit.
1.) Watch Your Spending
Track where your money is going. Mint, LearnVest, Personal Capital are great websites that can do this for you. I think this is a major step because it gives you an idea of where you can scale back. When you’re living paycheck to paycheck you’re living beyond your means. Figure out ways to reduce your expenses. There is always room to cut back. Maybe it’s going out less, meal prepping your food, doing less shopping or going old school and paying for everything in cash.
2.) Increase Your Income
If cutting back and downgrading your lifestyle is unreasonable for you, maybe you could pick up a side hustle or second job to earn more income. Ask your employer for a pay increase or switch jobs to get a pay raise.
3.) Build Up Your Checking Account
Now that you have extra income from either reducing your expenses or increasing your income. Start to build a financial cushion within your checking account. I personally like to keep at least a month’s worth of expenses plus $500 in my checking account at all times. This amount is after all bills, rent, and other monthly expenses are paid. For example: If all of your expenses for September was $2,000. On October 1st, you should have at least $2,500 sitting in your checking account. This cushion is to prevent overdraft fees and to handle any other minor unexpected expenses that may occur within the month.
4.) Start a Quick Emergency Savings
Open a savings account, this can be attached to your checking if your bank allows it or separate if you want to. I have a savings attached to my checking and I use that as my quick emergency savings. I try to keep at least $1000-$2000 in there at all times for emergencies. That way, if I had a major unexpected expense like a flat tire or medical bill. I wouldn’t feel pressured to borrow the money or pay for it with a high-interest credit card. I can just borrow the money from myself and gradually build it back up.
5.) Attack High-Interest Debt
Once you eliminate the amount you’re paying towards high-interest debt every month, it can go towards building up your net worth. I say high interest because those are the debts that are costing you the most to maintain. Student loans and mortgages tend to have low and reasonable interest rates, so I wouldn’t prioritize paying those off before auto loans, personal loans, and credit card debt. A great way to attack high-interest debt is through the snowball effect. Snowball method of paying off debt is when you pay the minimum amount on the rest of the loans you have and put everything else towards the smallest loan. Once the smallest loan is paid off you roll that amount to the next smallest and so on until you’re debt free.
6.) Build an Emergency Fund
Start building an emergency fund with several months worth of expenses. This can be very important when it comes to dealing with a job loss, medical condition, broken air conditioner and life in general. This emergency fund is to protect you from falling back into a lifestyle where you’re trapped in debt. This fund can also give you financial security if you ever decided to pursue entrepreneurship and start a business. If you had 6 months worth of expenses saved up, you wouldn’t panic if you missed a paycheck or two.