Stop living paycheck to paycheck: 5 steps(Read article summary)
More than two-thirds of Americans are living paycheck to paycheck, meaning the financial ground they're standing on is incredibly shaky. Here's how to break the cycle and
Andrea Melendez/Des Moines Register/AP/File
In a recent study conducted by theÂ American Payroll Association, 68 percent of the 30,600 people surveyed said it would be somewhat or very difficult if their paycheck was a week or more late. In other words, more than two-thirds of Americans are living paycheck to paycheck.
Itâ€™s a lifestyle I know all too well. I lived paycheck to paycheck for years, sometimes running out of cash days before my next payday. I spent too much and racked up debt. My entire financial safety net was the $50 minimum required to keep my savings account open.
My game-changing moment came when my paycheck bounced and the financial tightrope I was walking on snapped. I had to borrow money from family to keep from being evicted. I knew I was going to have to change something to keep that from happening again.
For the next few months, I worked on my finances. Now I have a pretty decent emergency stash, some money saved for retirement, and even a few investments. Here is how I did it.
1. Adjust your attitude
For some, living paycheck to paycheck can be a lifestyle choice. In my case, I chose to ignore my financial reality and live beyond my means, so I never got ahead. To help myself change my attitude toward money, I made a list of goals and rewards:
- Pay off debts to improve my credit score so I could one day own a home
- Build an emergency fund so I could start saving for fun things like a vacation
- Stop wasting money on little things I didnâ€™t need so I could buy bigger things IÂ didÂ need later on
Creating a vision of what I could have in the future made it easier to make better financial choices.
2. Create a savings-friendly budget
Surprisingly, I had a budget, but it was a horrible one that only accounted for my living expenses. It looked something like this:
- Monthly incomeÂ â€“ $1,800
- RentÂ â€“ $750
- UtilitiesÂ â€“ $85
- Cell phoneÂ â€“ $85
- InternetÂ â€“ $45
- RemainderÂ â€“ Spend on whatever!
I didnâ€™t budget for any of lifeâ€™s other necessities like toilet paper and food, and I didnâ€™t plan for the future. As a result, I paid my bills, put the minimum amount due toward my credit card, and wasted the rest of my income.
To meet my goals (and realize my vision), I needed a better budgeting system. So I created one that included every purchase I made in the month â€“ like groceries, personal care products, dog food, and the little extras. And then I included putting money into savings. For years now, Iâ€™ve put 10 percent of my income into my savings account automatically. Itâ€™s part of my budget, just like rent or car insurance.
3. Track spending
Once I had a detailed budget, I figured my financial situation would improve â€“ and it did. But I still found myself running out of money every month. Curious as to why, I saved every receipt for a month. At the end of the month, I added it all up by purchase and realized I was spending far more than I thought. All of those $2 purchases here and there, running to the store to get one thing I forgot, or buying a pricey latte were killing my budget.
Since I realized I could easily go over budget, Iâ€™ve kept track of my spending. Now I use online budgeting software likeÂ MintÂ to automatically see where my money goes, and I havenâ€™t gone over my budget in years.
4. Trim the fat
Once I got my spending under control and had some money set aside for emergencies, I started focusing on one of my bigger goals â€“ paying down myÂ credit cardÂ debt. I figured out how much I owed, about $2,500, and set a one-year goal date to pay it off by. To do so, I was going to have to come up with about $210 a month to pay toward my credit card.
To get what I needed, I trimmed some things I really didnâ€™t need or even use that often out of my budget. Here is what I cut:
- Cable TVÂ â€“ $65
- Gym membershipÂ â€“ $45
- 3 magazine subscriptionsÂ â€“ $33
- Monthly hair color at a salonÂ â€“ $85
Now I watch Netflix, take my dog for a run every day, read blogs, and keep my hair my natural color. I donâ€™t miss any of it, and I was able to pay off my debt in a year. The following year, I started putting that extra money into my â€śvacation fundsâ€ť account. Trust me, seeing my favorite bands atÂ South by SouthwestÂ inÂ Austin, Texas, was better than sitting in my living room reading Cosmo.
5. Donâ€™t trade life experiences for money
Living in New Orleans, it was just accepted that if I went out, I had to spend a ton of money. Every weekend my friends and I ate at a nice restaurant, or bought concert tickets, or racked up a hefty bar tab. I was new to being on my own and thought spending hundreds a month on social activities was just what adults did.
I thought I was going to have to sit alone in the dark every night to save money. So when the weekend rolled around, I told a friend that I needed to start saving money and she said, â€śMe too!â€ť That is when it hit me. Most people donâ€™t love being broke. And maybe if we had something cheaper to do, we could all save some money.
So I went to my cityâ€™s tourism center and made a list of every free activity I could find. I found free concerts, firework shows, festivals, parks, and museums. Now my friends and I still go out every weekend. I still buy the occasional ticket to see the Saints play or eat at a nicer place, but most of our activities are free.
The bottom line: I didnâ€™t give up my life experiences just to save a buck. I still have fun.
It wasnâ€™t easy to stop living paycheck to paycheck, but the way I did it can work for anyone. You just need a vision â€“ and of course, a little sound advice never hurts.Â
Angela Colley is a writer forÂ Money Talks News, a consumer/personal finance TV news feature that airs in about 80 cities and around the Web. This column first appeared in Money Talks News.