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If you’ve ever heard of the theatre play Rent, you might’ve heard of its famous opening song Seasons of Love. The song tries to equate the different ways you could measure a year. It even starts with the words “Five hundred, twenty-five thousand, six hundred minutes”, which is how many minutes a year lasts. While you might not think of your entire year that way, you might equate your month based on your paydays.
Before we dive into the key steps to avoid living paycheck to paycheck, let’s explain what that means. Living paycheck to paycheck means that you struggle to make ends meet your monthly needs. You design your expenses and costs based on how much money you’ve earned for the month. So, if you earn around $6,228, which the Bureau of Labor and Statistics reported as the average salary in America, then you spend approximately that much in a month. By the time your next paycheck arrives, you’d have little to no cash left at your disposal. Because of this, the cycle starts over again and you spend as much as you earn in the next 30 days.
Now, there are various reasons why people are living paycheck to paycheck. One is that they believe this lifestyle is the only possible way to survive. For them, it’s hard to imagine saving money when they have to cover rent, food, and other important expenses. However, this can also come from a lack of financial discipline. Not every expense in your monthly plan is as necessary as you might think. Sometimes, you might splurge on a nice dessert or an exciting clothes sale. The reality is that you can save some money, even if it’s only as much as $5 at a time. The problem isn’t that you can’t afford to save, but that you think you can’t.
Another reason why you could be living paycheck to paycheck is poor financial planning. If you take longer than a few minutes to review your salary and monthly expenses, do they add up? Sometimes, you might overestimate your attitude toward expenses. Perhaps you assume that the budget in your mind is more than enough to cover what you need. It’d be like going to a grocery store to buy your weekly necessities but without an actual budget. Sure, you might have everything you want, but you could also be paying more than expected.
Now that you know what living paycheck to paycheck means, it’s time to dissect what it entails. At first glance, it might seem like a sustainable way to live. However, the longer you rely on your paychecks like this, the more difficult it becomes to manage your expenses. Here are four different dangers you face when you are living paycheck to paycheck.
It offers no protection for planned and unplanned expenses.
If your monthly paycheck becomes your entire monthly budget, then you might think you’ve covered all expenses. However, life is rarely so predictable. There are lots of unplanned expenses that could make your financial life much harder. Accidents, medical emergencies, and even outings with friends can leave a gaping hole in your pocket. Even the expenses you planned for, like rent or utility bills, can still eat a lot of your money away. Without proper financial planning, living paycheck to paycheck will only leave you defenseless.
Aside from planned and unplanned expenses, there is also the threat of debt. When emergencies happen or payment is due, you might resort to loans for your cash. However, while it’s easy to file for and get a loan, it’s much harder to pay it off. Even those with strict and sound financial plans can struggle to cover their debts. Now, imagine trying to do that when you can hardly afford to save money each month. Without the right amount of discipline and discretion, living paycheck to paycheck could get you into the cycle of debt. Worse yet, it could trap you there for a very long time.
Living paycheck to paycheck can bring out lots of financial burdens, but it also drives away lots of financial possibilities. If you’re planning to buy a house or start a family, it takes a lot of capital and foresight to turn into a reality. Unfortunately, when you rely on your monthly salary to get by, those things seem impossible. Worse yet, those who try to make those things happen while living paycheck to paycheck are only inviting disaster. If you can’t feasibly plan out your costs for the next month, it’s going to be much more difficult to plan out investments that take years to fulfill.
Lastly, living paycheck to paycheck is as much of a psychological problem as it is a financial one. The struggle to make ends meet can be taxing on your mind, sometimes more than on your wallet. If you struggle to pay bills and debts, you might feel insecure and vulnerable. You open up your mind to stress and anxiety, especially when you feel that you don’t have enough. What’s worse is that you might resort to impulse spending to try and relax. By doing so, you not only start a habit that causes problems, but you also make your financial situation worse.
By knowing the dangers of living paycheck to paycheck, you can now motivate and push yourself to stop the cycle. To make your financial goals span farther than a month, you need to change your habits and mindset right now. Here are six ways you can stop living paycheck to paycheck!
When you hear of “retirement”, your first thought could be that it’s too soon. Preparing for a post-career life, especially when you’re juggling your daily tasks, sounds ridiculous. However, it’s that same attitude that’s causing you to spend your money recklessly. The fact is that everyone will retire from work someday, including you. Even if it takes twenty or thirty years to happen, it will eventually happen.
So, if retirement is inevitable, why not take the steps now to prepare for it? By starting this very moment, you give your funds a better chance to grow and build to something meaningful later on. Having thirty years of work means you have thirty years of planning and preparation. This means you can examine your money, envision your retirement, and estimate how you’d need to fund that into reality.
Once you estimate the cost, that’s when you can start to think about saving money. Many people like to spend their leftover cash because they don’t think it has a purpose. If you start saving money and change to build to your retirement, you give each dollar a reason to be retained. More importantly, you train your mind to avoid wasting money so quickly. Instead, you now see that your leftover bills can be useful. This can give you a better reason to hold on to your savings and build them up over time. Once that happens, you start to live beyond your paycheck dates. Now, you can build towards the future!
Living paycheck to paycheck is not easy, but doing that while in debt is dangerous. If you have student loans or outstanding bills, you’ll struggle to make ends meet even if you start saving money. The reason is simple: debts can be cash pitfalls and they grow with interest over time. If you don’t pay off your debts, you risk spending even more money in the future.
To solve this, start by looking at your existing debts. See which ones take the most priority, either by the due date or by the amount. Once you find the one that needs your attention, focus your savings on paying that off. The sooner it’s cleared from your history, the easier it will be to save money and plan accordingly.
In addition, a debt that’s paid off can boost your credit score, which can help you gain better loan options in banks. To clarify, this doesn’t mean you should get a loan after you pay off your debts. You should always consider if you can afford to reimburse the amount. However, loans that are used for investments, like housing or education, can be a worthwhile risk to take.
If you’re wondering how you can pay off debts quickly, start by looking at the minimum amount due. If it’s possible, pay 50% or 100% more than the required amount per month. The more you pay, the quicker it gets released. That way, when you finally are cleared from debt, you can divert that extra cash to build more savings or pay for investments. Once you do that, you can stop living paycheck to paycheck and start moving to long-term goals instead.
When you’re living paycheck to paycheck, you’ll struggle to afford any unexpected costs. As mentioned before, the possibility of accidents or emergencies could leave you in a tough spot. Imagine having to cover $5000 for damages when you can barely afford to buy dinner. That kind of dilemma could ruin your savings and leave you in debt for months.
To avoid this possibility, make it a point to build an emergency fund. Also known as a back-up budget, this fund is meant to cover any unplanned expenses that come your way. Whether it’s home renovations, medical bills, or even raised rent, this type of cash can give you peace of mind. Experts recommend that you save at least three months’ worth of your daily needs in one emergency fund. That way, you have enough cash to provide for yourself as you pay off any dues.
To start building a back-up budget, you should always set aside a small portion of your salary away. Saving up to 20% per month can be a good way to grow your emergency savings. You can automate your salary to divert that percentage to a separate account. That way, you won’t be tempted to spend the money, since it’s already saved elsewhere. You could also collect any leftover change, from coins to bills, to be saved in a jar or piggy bank. They may seem small, but with enough time, you’ll find a good amount of cash stored for whatever payments you have.
Sometimes, the reason why you’re stuck living paycheck to paycheck is the income. You might be financially disciplined, but the profits you make leave a lot to be desired. Some people have earned enough money to get by, but not enough to pay for their long-term financial needs. If this is the case, then it’ll be hard to afford a happy life when you don’t have the funds for it.
To break through this cycle, you can look into investment options and other income streams. Boosting your profits is a good way of expanding your options. You can start with traditional methods, like asking for a raise or seeking a job offering a higher position. Either of these paths can guarantee you a better paycheck, though you will need to convince your employers that you are worth it. You can also start a side hustle, a secondary job that gets you extra money without interrupting your career. For example, some people earn by selling baked goods on the side. Through it, they can enjoy their passion for baking and make some extra cash with their friends or neighbors.
Alternatively, you could also look into options like the stock market or hedge funds. While these are more technical, they can earn you a good deal without heavy supervision. As long as you keep an eye on how your shares or stocks are, you can sell them at the right time to get some much-needed money. You can also look into bonds, which are loans you make to companies and other organizations. Through it, you get paid back your money with interest over a period of time, such as five years.
Sometimes, you need more than a general idea to motivate your financial dreams. The idea of “retirement” is great, but it can be interpreted in so many ways. Plus, your financial goals are not going to be the same as those of other people. For example, you might want to settle down and have a family at the age of 35, while someone else would rather travel the world at that age. In any case, knowing what you want is half the motivation. The other half is specifying it.
To stop living paycheck to paycheck, consider building a bucket list budget. When you finish paying for your debts, saving your due amount, and building your emergency fund, you might still have a few dollars left over. For example, imagine that you paid off and saved all that you need, and you get $1000 left over. A bucket list budget is a way for you to divide that remaining cash to experience what you want in life. Remember, saving money doesn’t mean you have to deprive yourself of a good time. It’s about knowing how much you can afford.
If you go further, you can divide that leftover cash into different categories or ambitions you have. For instance, out of that $1000, you can use $300 to buy a new stock or investment that you want to try. You can then use $250 to save up for a special vacation fund, like a road trip or a destination weekend. You can get another $250 to get a concert ticket or a theatre play that you’ve been itching to go to. Then, you can finish off the remaining $200 to your housing budget. With all these different choices, you’ve successfully used your remaining cash to make yourself happy and pay towards a better tomorrow!
Lastly, living paycheck to paycheck can sometimes be a lot tougher for you than expected. If you follow all the previous tips, you might find some parts confusing or unrealistic. Perhaps you aimed for a large emergency fund but you’re not anywhere near it. Maybe you have planned for retirement but your current savings won’t be enough to pay for it. If these dilemmas are happening, what can you do?
The best answer is to always consult with a financial expert or professional. There are plenty of advisors that can assess your spending habits and show you things from a different perspective. Their insight can help you forge a better plan, either in maximizing your profits or reducing your expenses, in the long run. By listening to their advice, you can find out different things about your financial habits. You might even discover problems that you hadn’t expected or fully understood.
For instance, a financial planner can examine your credit history and explain why your score is bad. Perhaps there are existing subscriptions, like Amazon or Netflix, that are eating at your budget. There could also be lingering debts or unpaid bills that are hurting your wallet. With a professional eye, you can quickly learn more about these hidden setbacks and work on them right away. Once you understand this, you’ll be able to stop living paycheck to paycheck. Instead, you’ll give yourself a chance to plan for the future and make a financial plan you can be proud of!
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