Half of Americans live paycheck to paycheck.. Yes, it’s true. Whether it’s a stagnant job, unemployment, caring for an ailing family member, a medical emergency, debt, or poor financial planning, 50% of Americans struggle to get by according to a study conducted by MarketWatch. A separate study by MetLife found nearly 50% of employees are “concerned, anxious or fearful about their current financial well being.”
What can you do to get out of the seemingly endless cycle of living paycheck to paycheck? The answer is a lot. So perk up and get educated! Here’s a four-step process to stop living from paycheck to paycheck:
1 – Assess Your Cash Flow
How much money do you make per month? Is it greater than your debt? If your debt payments is more than 30% of your income, you’re in a rough spot. If your debt-to-income ratio is closer to 20%, you are in a better place to start minimizing unnecessary expenses.
2 – Create a Budget
The best thing you can do to get out of the living paycheck to paycheck rut is to learn to budget effectively. Start the budgeting process by looking at ALL of your expenses. Start with basic living expenses.
- Utilities (electricity, water, sewer, gas)
- Food (groceries)
- Car payment
- Car insurance
- Gas (or transportation costs)
- Medical insurance (including co-pays and out-of-pocket costs)
Then, write down all your discretionary expenses. That includes:
- Cell phone
- Entertainment (eating out, movies, bars)
- Travel (hotels, airfare, train)
- Personal care (makeup, skincare, hair cuts)
- Clothing (as well as shoes, accessories)
After you’ve got a list going, question WHERE your money is going and HOW MUCH of it is going to each line item. Match that up with your income and you can quickly establish your monthly budget. Here are a few of our favorite tools to track your monthly budget:
3 – Figure Out Additional Revenue Sources
Are there opportunities to work more hours at your current job? If you are working a part-time job, are there opportunities to log in more hours? If you are a full-time employee, the gig-friendly economy we live in makes it pretty easy to pick up some “side hustle” income – think freelance writing or designing, driving, or even selling goods at a farmer’s market. Just a few hundred dollars a month can help you get out of debt and out of the paycheck-to-paycheck cycle.
4 – Understand Debt, Loans, and Interest Rates
Debt comes in many forms – student debt, credit card debt, or medical debt. Debt can also come from loans – like payday or auto loans. While loans and credit cards may seem like “free money” when you first get them, some have high interest rates — further funneling you into living paycheck to paycheck.
While it’s improbable that you’ll get out of debt immediately, take strides towards reducing your overall debt. To start, reduce your credit card use until you are out of the cycle of living paycheck to paycheck. Also, stop obtaining new loans cold turkey.
BONUS: Create a Rainy Day Fund
Your emergency fund can help you pay for home or car repairs, unforeseen medical costs, and cover other unexpected expenses. This is an important step because then you won’t have to rely on loans or family to support your finances.
For more budgeting tips, head here.