A staggering 78% of Americans are currently living paycheck to paycheck, meaning that more than three-quarters of Americans are struggling to save or invest after paying for their monthly expenses. This percentage is not just a small increase from the previous year, but a 6% jump.
This is seriously concerning. It’s clear that while so many Americans have jobs and make money, they’re lacking the necessary skills to manage their incomes effectively. To counter this issue, here’s a step-by-step guide on how to stop living paycheck to paycheck.
Creating a Budget
The first step when it comes to how to stop living paycheck to paycheck is to know exactly your income and expenses, and you do this by creating a budget. The reason you need to create a budget and figure out what your income and expenses on a monthly basis is so you can know exactly how much money you’re saving each month, or how much you’re in the negative by.
If you’re living paycheck to paycheck, this means that your monthly expenses are equal to your monthly income, or even higher. This is, of course, extremely concerning. Therefore, you should immediately set up a plan to change that. You can download an Excel budget template to track your spending. If you prefer Google Sheets, then you’d be happy to know that it offers a simple and free budget template that you can use. But if you’re more old fashioned, you can simply write down your budget using a pen and paper.
Once you pick the best budget template for you and familiarize yourself with it, you can start budgeting by calculating your income. You might have multiple income sources, so you’d need to account for all of them. For example, you could have your monthly salary from your job, as well as some extra money from a side hustle.
When it comes to budgeting, figuring out your income is the simplest part. In fact, the trickiest part is figuring out your expenses. A mistake a lot of people make when budgeting is to try and estimate how much they spend on each expense, and while this works well for fixed expenses like rent, it becomes impossible to do once you run into variable expenses. For example, you might estimate that you’ll spend $350 on groceries this month, but you end up spending $400 because prices went up and you didn’t account for that. Therefore, you need to be aware of how your variable expenses work, and whether they increase or decrease each month.
A good way to do this is to go to your bank and request bank statements covering the last three months. Then, you can write down a list of all the different categories of expenses that you’ve had over these three months, and how much you spent in total each month in each of these categories. After that, you can work out how much you spend each month in each expense category by taking an average of the three months.
Here’s an example on how a budget works. Let’s say your monthly rent is $1,700, and you also pay $200 each month for utilities. As for groceries, let’s say you spend $500 on them per month, but you also like to eat out a lot, so you spend $200 on that each month. Now, there are other essentials that you should account for, like your phone plan, which you spend $50 on, and your insurance, on which you spend $150 each month. Let’s say you also have a car, and you pay $200 per month for gas for it.
You might also be paying for more than one monthly subscription service, so let’s say this costs you $50. And if you’re living paycheck to paycheck, you might also have some sort of a debt payment, and this can be anything from a personal loan to student debts, you name it. Let’s assume you pay $550 per month for it.
One budget item that you should also include, which a lot of people often overlook, is miscellaneous expenses. You’ll always run into random expenses that can’t be fitted into a specific category, like taking a flight to visit your family in another state. This means that you need to budget for these irregular expenses to not go over your budget. In our example, let’s say you spent $400 on miscellaneous expenses. Of course, there are many more expenses that you could have, so you need to go through your own banking statements to make your own categories and list.
Reducing Your Expenses
Let’s say you make $4,000 each month, but by adding up all the expenses mentioned above, you also spend $4,000 per month, meaning that you’re not saving any money, and this became very apparent when you created the budget. At least now we know where the problem is, so here are ways you can reduce your monthly expenses.
You need to pick up your budget and start scrutinizing each and every expense category. If you do this, you’ll definitely be able to reduce the majority of expenses, without taking away too much from the things that you love doing. For example, you might be eating out a lot, but you don’t have to completely give that up. You can always reduce the number of days you eat out on. You might even find out that you pay for a lot of unused subscriptions, so you can get rid of them.
You can also reduce your groceries bill by going to the store with a list in hand that has everything you need written on it. That way, you’ll resist the urge to buy a lot of extra items that you buy in the store, but don’t really need. You could also start going to discount grocery stores or liquidation stores, which sell discontinued, damaged case, and overstocked products. An example of a store like this is American Discount Foods in Arizona, which often sells products for 75% less than their normal retail prices.
You might also be able to find a cheaper phone plan by abandoning the big names like AT&T (NYSE: T) and working with a mobile virtual network operator like Mint Mobile, Consumer Cellular, or Republic Wireless, which offer plans ranging from $15 to $40.
Increasing Your Income
To sum up, all you need to do is identify expenses that don’t have a huge impact on your life, and try to reduce them or remove them completely. If you do this and still struggle with living paycheck to paycheck, then you might need to look for ways to increase your monthly income.
If you can do it, you should try to get a second job after your 9 to 5. Ideally, this job should have a minimum pay of around $15 per hour, which could get you an extra $1,000 monthly if you work four hours for five days each week. If you don’t have the time to get another job, you opt for a side hustle. Many people drive for Uber (NYSE: UBER) or Lyft (NASDAQ: LYFT) on the side to make some extra money, and some run very profitable online side hustles, so you can pick whatever side hustle that fits you.
But this also can take a considerable amount of time, and not many people have the ability to start a side hustle. If you’re one of those people, you can always go through your stuff at home and try to sell whatever you don’t need, like old clothes or old furniture, online. This can help you make some money, and get rid of the stuff you don’t really need.
If all of this doesn’t work out for you, you can always ask your employer to give you a raise, but this might not be practical for a lot of people, as you might’ve already been given a raise a few months ago, so asking for another one will go nowhere and you might risk losing your job. The truth is, a lot of people in the U.S. find it easier to just switch jobs for a higher salary, rather than asking for a raise, so maybe you can do that if you can afford to.
Putting Your Savings Into Work
The main thing you should prioritize when you have some extra money on hand, is to pay off any debt you might have. Debt is one of the main reasons why people are living paycheck to paycheck, so you need to use your savings to take care of it quickly to not fall back into the same cycle. After paying off your debt, you might want to start saving for an emergency fund that could help you cover up to six months of important expenses. This will help you survive any difficult financial times you might face in the future, like going through a medical emergency and having to go to the hospital.
Once you’ve taken care of your debt and saved enough money in an emergency fund, you can start investing your savings to grow your wealth. Most people start investing by investing through their retirement accounts, and I’d suggest that you start investing in a broad stock market index fund ETF, like the Vanguard Total Stock Market ETF (NYSEARCA: VTI), since this will invest in high-quality stocks for you, as well as provide you with a lot of diversification.
The Bottom Line
This was our step-by-step guide on how to stop living paycheck to paycheck. Hopefully, you can use this guide to break free from the paycheck to paycheck cycle and achieve financial freedom.
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