Researchers have found that a large number of households in the United States are living their lives from paycheck to paycheck. They have little or no savings and rely heavily on the influx of cash on paydays to make ends meet. The Brookings Institution reported in April 2014 that 38 million American families, or nearly one-third of US households, are living paycheck to paycheck. For most of these families, though, a few changes and some attention to detail could help them break that cycle and start building a savings account.
Identify that you live paycheck to paycheck
Four simple questions can help you determine whether you rely heavily on each payday.
- Do you know specifically what days you get your paycheck?
- Do you put off essential expenditures, like buying groceries, until immediately after you receive your paycheck?
- Do you eliminate large purchases, like going on a vacation, because you never have enough money?
- Do you have little or no money in savings?
If your answers are yes to at least three of these questions, then you may need some tips on how to break that cycle.
Problems with living paycheck to paycheck
A wide range of financial and emotional consequences result from depending on each and every paycheck for essentials. These include:
- No money is saved to handle emergencies
- Interest costs from borrowing money to cover unexpected expenses adds to the financial burden and monthly budget
- Fees from late bills, bounced checks or overdrawn accounts, which all contribute further to the lack of savings
- Stress of always checking account balances and making sure money is available for making purchases
Look for expenses to trim away
The key thing you need to do to create better spending habits is to trim away unnecessary expenses. Most people have at least a few things they are spending money on that they do not need. In many cases, you can cut back on these areas of extra spending for just a few months until you build up some savings, then start adding them back in as you can afford to or continue to build your savings.
One common expense to get rid of is eating out at restaurants and fast food places. You can also reduce the amount of money you spend on drinks, including alcohol, sodas, and specialty coffee. When it comes to shopping, withdraw a limited spending allowance in cash after each paycheck and use that for all your spending until your next paycheck.
Begin paying bills right away
One of the benefits of getting off the cycle of living paycheck to paycheck is that you can pay your bills immediately, rather than waiting until the paycheck immediately before they are due. This reduces the chance that you'll miss a payment and get hit with late fees. Once you have a bit of a buffer in your checking account, get in the habit of paying your bills as soon as you receive them. Another option is to have a particular day of the month when you pay all your bills, so you do not have to think about them at any other time.
Know what's right for you
What works for other people might not be right for you, so it is your responsibility to know your opportunities. Take the time to write down everything you spend money on for a month so you understand better where your money is going and where you can make changes. Another way to help you succeed would be to get a part-time job, just until you build up enough of a buffer in your checking account to feel free from counting down the days until your next paycheck.
Through all of this, it is important to keep your eyes on the prize. Once you have some money in savings and have a buffer in your bank account, you will be less stressed about the state of your finances. Plus, you will be able to control your money better and work toward your bigger financial goals, like getting out of debt or saving up a down payment to buy a house.