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Ever feel like you’re stuck in a never-ending cycle, living paycheck to paycheck, barely scraping by and making ends meet?
“Is this all there is to life?”
Well, the good news is that breaking free from the living paycheck to paycheck cycle is possible.
So, let’s dive right in and end this never-ending nightmare.
8 Steps to Stop Living Paycheck to Paycheck
8 steps?! Seriously?!
Yes, I’m serious. And here’s why, according to PYMNTS’s data:
- Less than $50k income per year: about 75% live paycheck to paycheck.
- $50k to $100k per year: about 67%
- More than $100k per year: about 48%
- More than $200k per year: about 34%
The above data clearly shows that it isn’t just about making more money; it is also about how you manage your spending habits.
So, let’s jump right in now.
1. Take Charge of Your Money
If you’re sick and tired of living like this and wish to stop it, creating a budget is your first step toward taking control of your finances.
Sure, you’ve heard it a million times: “You need a budget.” And while you may be sick of hearing it, it’s a piece of advice that’s stood the test of time for a reason: it truly works.
A budget forces you to note your income and expenses. It shows you where your money is coming from and where it is going. When you start being informed about your finances, you see where the leakages are and can begin to plug those holes.
So, why wait? Start now and learn how to budget your money.
2. Make Smart Spending Choices
The next step in gaining a deep understanding of your finances is to understand the difference between your needs and wants.
This distinction is crucial as it makes prioritizing needs (essentials) easier than wants (luxuries). Needs include mortgage or rental, groceries, utilities, healthcare, etc. Wants are the nice-to-haves, such as luxury items, dining out, latest iPhone, etc.
Recognizing this difference is crucial for your financial health and cultivating good money habits.
For example, you need a car to get to work. A Honda or Toyota is sufficient to satisfy your need for a car. However, a Mercedes Benz or other luxury cars will be considered a want.
When you make these distinctions, you become more conscious of your spending decisions. This will lead to you making better financial decisions that align with your future goals and values, paving the way to better financial health.
3. Live Below Your Means
Why are the six-figure earners living paycheck to paycheck?
Wouldn’t a bigger paycheck mean they could live a more comfortable life? Yet, PYMTS’s survey showed that almost half (48%) of those making $100,000 or more are living paycheck to paycheck. Even more mind-boggling is that those making $200,000 or more and are only making ends meet said this is due to insufficient income.
However, the report found that the reason is their poor choices.
Often, when you get an increase in income, you start upgrading your lifestyle accordingly.
You may start having more dine-outs and upgrading your wardrobe, cars, and maybe even your house. This is what we call lifestyle creep or lifestyle inflation. It gradually blurs the line between needs and wants, as shown by the previous example of the need for a car.
But if you completed the first two steps, lifestyle creep will not have a chance of messing up your finances.
For example, one of the budgeting methods I like is the 50 30 20 Rule. This budgeting rule splits your after-tax income into three categories: 50% to needs, 30% to wants, and 20% to savings, investments, or debt repayments. This ensures you continue to pay off debts, save, and invest with 20% of your income. And as your income increases, all three categories also increase on a dollar basis. Thus, you do get to enjoy a little of your hard work as well while limiting you to no more than 80% of your income.
This approach ensures you manage your spending responsibly and continue living within your means, even as your income grows.
4. Always Pay Yourself First
There is one common habit among self-made millionaires, and that is they always pay themselves first.
It all starts with a shift in mindset.
The millionaires pay themselves first because they prioritize their future and goals over their current lifestyle. And they are more than happy to downgrade their lifestyle if it means they can get to their goals quicker.
Here’s how you can do it too:
- Set It and Forget It: Set up automatic transfers to your account every payday.
- Start Small, Aim High: Start with a small amount and gradually increase it over time. The key is consistency and growth.
- Define Your Dreams: What are you saving for? A home? A new car? A comfortable retirement? Use the SMART goal-setting to set your financial goals. (more on this later)
- Challenge Yourself to Save More: You can get started with many money saving challenges immediately to begin saving up for your goals.
- Learn to Invest: Investing helps you keep up with inflation and grow your wealth.
By committing to paying yourself first, you’re actively taking small steps and making progress. As you continue on this path, you’ll notice a growth in your savings and investments and greater control over your life.
5. Grow Your Income Streams
The escalating cost of living is a predominant factor driving many into the cycle of living paycheck to paycheck.
While traditional advice often revolves around cutting expenses and living frugally, the current environment demands more than that. With technological advancement and social media, opportunities to make more money are plentiful. And the additional income from side hustles can help you break free and reach new heights quickly.
For example, platforms like Upwork and Fiverr offer many opportunities to find freelance work, but they also have some unpredictability. Starting small with a few gigs is a great way to test the waters and gradually build your presence and credibility in the freelancing world.
Also, I’m sure you’ve heard it before: “Your network is your net worth.” So be sure always to network and build genuine connections.
Lastly, never stop learning.
In a constantly evolving world, adding new skills or continuously refining them can potentially open doors to countless opportunities.
6. Stay Away from Bad Debts
Recklessly spending on credit cards or upgrading and taking out new and bigger car loans can wreck our finances, leading to a cycle of living paycheck to paycheck.
To break free, it’s crucial to be cautious about incurring new debts, especially those that can escalate quickly.
Always ask yourself, “Is this really worth it? Do I want to be paying for this for months or years from now?”
When you’re in debt, you’re not just paying back what you borrowed; you’re also paying the interest. And you will end up paying a lot more than you expect to.
Nevertheless, if you do have debts, it’s important to handle them strategically. Here are two ways to do it:
- Avalanche Method: Rank your debts from highest to lowest interest rate and focus on the highest-interest first.
- Snowball Method: Start with the smallest debts and work your way up, gaining quick wins and momentum as you go up the list.
By being mindful of your spending decisions and managing your debts carefully, you can work towards a stress-free future.
In short, do you want to stop living paycheck to paycheck? Avoid incurring unnecessary debts!
7. Proactively Plan for Big Spending & Unexpected Expenses
Start by taking a moment to really think about what you want in the future.
Picture it clearly in your mind, whether it’s traveling the world, owning a cozy house, or enjoying a peaceful and comfortable retirement.
Now, work out the numbers. How much will they cost? When do you hope to achieve those numbers? Then, break them down into parts and set up your sinking funds for them.
A sinking fund is specifically for up-and-coming expenses such as anniversaries, vacations, birthday celebrations, and others. Instead of having a lump sum amount jumbled up within one savings account, you set up several sinking funds for various specific goals. This makes it easier to keep track of your progress.
Also, many things can happen in life out of the blue, such as medical emergencies and loss of income. So, build up an emergency fund of 3 to 6 months of living expenses to protect yourself from unexpected expenses.
By being prepared for the unexpected and proactively planning and saving for expected expenses, you can create a more stable and predictable financial life.
8. Set and Pursue Your Financial Goals
Financial goals provide you with a direction in life.
Without them, you’re more likely to spend your money without a care in the world. Thus, it’s crucial to have financial goals.
The SMART goal-setting method is a fantastic way to set your financial goals.
- Be Specific: Be clear on what you want to achieve. For example, I want to save $6,000 for an emergency fund to protect myself from unexpected emergencies.
- Make it Measurable: Break down your goal into smaller, manageable parts that can be easily tracked. For example, I want to save $6,000 for an emergency fund in 12 months, which means $500 per month.
- Ensure it’s Achievable: Your goals should be challenging yet attainable. Take a look at your finances and determine if saving $6,000 in 12 months is possible.
- Keep it Relevant: Align your goals with your values and the life you seek to achieve.
- Set a Time Frame: Establish a clear deadline for each goal. This creates urgency and helps maintain focus, keeping you motivated throughout your journey. E.g., 12 months
Lastly, always celebrate your progress, no matter how small. Acknowledge these moments and use them as fuel to propel you forward.
Rise Above Living from One Paycheck to the Next
You’ve got this!
With what you’ve learned and know, you’re ready to break free and stop living paycheck to paycheck. Peace of mind and a higher quality of life come to those willing to sacrifice today for a better tomorrow. And I know you’ll do what it takes to wake up from this nightmare.
So take a deep breath and start your journey to financial freedom today.
Let’s get going!
