While the number of Americans who struggle has gone down, 40% of Americans surveyed still live paycheck to paycheck. With another 37% saying they sometimes need their next paycheck to make ends meet, over three-quarters of Americans struggle to pay their bills some or all of the time.
Living paycheck to paycheck goes beyond being just an income problem. In fact, what you earn might be a small factor depending on how you manage your money. The good news is this means you can start on a plan to stop living from paycheck to paycheck today. Here’s how.
Stop increasing debt
Using credit freely and racking up debt is what causes many to start living paycheck to paycheck. When you saddle yourself with debt, you become a slave to monthly payments.
If you’re above a comfortable limit for paying debt, start with cutting off credit cards. It’s easy put your credit cards away and avoid taking on more debt.
Look at other monthly payments you make, too. Car loans can be unnecessarily expensive, so ask yourself if you can or should afford the car you’re driving. Avoid financing other purchases like electronics or home improvements using high-interest loans.
Build up savings
You need to have backup savings ready. Living paycheck to paycheck means you’re one big bill for car repair or medical visits from big financial trouble. If you’re going to avoid taking on more debt in emergencies, the key is to have cash on hand.
Put whatever you can towards an emergency fund, even if it’s only $20 from every paycheck. Do this until you have a “starter” emergency fund of $1,000. This will prevent you from falling back on credit cards when you’re hit with an unexpected expense.
Pay down more debt
Take a close look at your current debt situation. Experts recommend limiting your debt-to-income ratio (including payments for your mortgage or rent) to about 30% of your gross income. Amounts much higher than this can signal a big problem and will limit what you have left to cover other living expenses like groceries and utilities.
Once you make the choice to stop taking on more debt, you need to work on decreasing the balances you have. Monthly payments may be eating up a good chunk of your paycheck, and you’ll want to get rid of them fast. Start doing more than the minimum right now. Squeeze extra payments out of your budget once you find unnecessary spending (that’s explained next).
Target debt using the debt snowball approach. This means putting all you can towards your smallest balance and moving on to the next smallest once that’s paid off. Studies have shown this method is the fastest way to pay off debt as it builds confidence and motivation.
Stick with a budget
If money is tight, how you spend every dime matters. Those who can’t stop living paycheck to paycheck may need a solid budget more so than anyone else. Because of this, you’ll want to do your best to plan how to spend your money before you actually do.
Creating a budget doesn’t have to be hard or time-consuming. You can create a simple budget in minutes using a spreadsheet or a budgeting template like this one. List all your expenses and do your best to estimate how much you spend on each every month.
Your budget doesn’t have to be perfect to start as you can adjust it as you go. The important thing right now is just to start creating a better system than you already have.
Track your spending
Evaluate how you’re spending your money and where you can cut back to save. Everyone has discretionary spending that they can cut out. If you don’t think you do, start by spending a week tracking every dime you spend. You may be surprised how little purchases of $2-3 for coffee or spent at convenience stores add up.
Tracking your spending is the key to making sure you follow your budget as well as to finding opportunities for savings. Keep a spreadsheet to track your spending, which can be done with the budget template above, or use a tool like Mint to log purchases on debit cards automatically.
Start thinking about the future
Once you get your finances on track and settled for the short-term, you need to start looking at the long-term picture.
Start working to improve your credit. You’ll need a good score to qualify for a loan and get the best interest rates on home mortgage and auto loans, should you need them in the future.
Once you’ve cleared up your immediate problems, you’ll have many more options for what financial goals to take on next. Now that you’ve solved some of the toughest money problems, you’ll be ready to work on other important and rewarding goals like saving for retirement and college educations.