Payday is still a couple of days away, yet you only have money for gas, and that’s it! You’re broke, again! Does this sound familiar?
According to a Highland Solutions survey, 64% of Millenials live paycheck to paycheck. 82% of the respondents said they wouldn’t be able to afford a $500 emergency.
But here’s the issue: you work hard, earn a decent salary, but between bills, debt repayments, and covering other expenses, money seems to be slipping through your fingers as soon as it arrives.
It’s now become a cycle where you start planning how you’ll spend your next paycheck way before it’s here. The thing is, you’re not poor; you’re simply broke.
Fortunately, there are ways to turn this all around. I’ll reveal 5 steps on how to stop living paycheck to paycheck and end the vicious cycle.
In This Article
1. Evaluate your money mindset.
Your money mindset is your entire life’s accumulated beliefs and attitude about money. Your money mindset influences the decisions you make about spending or saving and might be the reason you’re stuck in the cycle of living paycheck to paycheck.
Assess whether you have the following beliefs about money:
- “Life is short” – Yes, life is short, and it’s indeed essential to enjoy it, including during your retirement years. It’s possible to enjoy life and save some money for the future.
- “Money will sort itself out” – The truth is money is not going to sort itself out. If sorting out your money makes you miserable, you need to evaluate what your goals are, both short-term and long-term. There needs to be a balance between being responsible and creating a life you enjoy.
- “Having enough is enough for me” – This is a scarcity mindset that will forever hold you back. You’ll always be scrambling to make a few bucks to cover your bills and expenses. It doesn’t matter how much you earn: minimum wage or a high salary; you have a ‘broke mentality,’ and you’ll never have enough cash left.
- “I’m not good with money” – The fact that you’re this way money today doesn’t mean you’ll always be that way. Life changes, priorities change, we learn, and we grow. Take up a learning mindset, and there’s nothing you can’t achieve.
If you have any of the above mindsets, forget about the past. Forget everything you’ve always known about money and take up a learning attitude.
2. Take 100% Responsibility.
The next step towards ending the paycheck to paycheck cycle is to take full ownership of your current situation.
Most people who struggle financially always tend to find someone to blame for their problems. It doesn’t matter your education, family background, your partner’s habits, your employment situation; it is nobody else’s fault.
Understand that no one can help you as much as you can help yourself. You alone are in the best position to fix your finances and make your life better. Taking full responsibility is the first step towards making meaningful change.
Nothing is going to change for you unless you change.
3. Find out why you’re living paycheck to paycheck
Do you know exactly how much money you make and exactly how much you spend? Do you know your current net worth?
You need to assess your situation and understand why you’re living paycheck to paycheck. And to do so, you need to find out, to the letter, where you stand financially.
- The first thing is to list down all your income sources. Pull out your paychecks and check how much you really earn. Remember that what you take home at the end of the month is your gross income. Gross income is the money you get after deductions such as taxes, social security, and pension have been made. If you’re self-employed, calculate your average salary for the last six months.
- The next thing is to list down all your expenses, including your debt payments. This could mean pulling out your bank statements for the last few months and going through them line by line, grouping them into categories, i.e., fixed expenses, variable expenses, and fun money. You can also use tracking tools such as YNAB or Mint to track your spending. These tools allow you to link your bank accounts and credit cards and group all your spending into categories. This will reveal categories you are spending ridiculous amounts of money on and areas you can cut back without killing all the fun.
- Next, compare your income to your expenses to see if you’re living above your means or right within your means (paycheck to paycheck).
Consider this: Do you have an income problem or a spending problem? Be honest with yourself. Would spending less on unnecessary or luxury things free up more money to put towards savings? Then you have a spending problem and need to spend a bit more wisely. On the other hand, do you spend reasonably but still struggle to get to your next paycheck without turning to credit cards? You have an income problem and need to earn more.
4. Earn More
Before we explore ways to increase your income, here’s something you need to know. The reason most people live paycheck to paycheck has nothing to do with how much money they make.
People tend to increase their spending depending on the level of income they’re in. Meaning that if you get a raise, you’ll find ways to spend more money. It would be best to address this habit before you can consider getting that extra job or starting a side hustle. Otherwise, you’ll continue living paycheck to paycheck just with a bigger TV or a better car.
Earning more money is a great way to stop living paycheck to paycheck, only if the high income is well utilized.
So here are some ways to increase your income:
- Re-negotiate your salary
- Improve your skills to move up the ladder.
- Look for a new job with a higher salary.
- Look into switching careers or fields of work.
- Start a business
- Start a side hustle.
- Create passive income sources, e.g., dividend income, rental income etc
5. Spend Less
Now, let’s address the spending problem. Most of us underestimate how much we spend. In this day and age, you can simply swipe your credit card for any purchase without thinking.
But if you stop to do a little math, you’ll realize how those small purchases add up to some big bucks. If you look deeper into your expenses, you might discover that you’re driving a car you can’t afford and buying jewelry you’ll soon be unable to pay for.
It’s impossible to know where you’re overspending if you don’t track how you spend.
Track your spending
To stop living paycheck to paycheck, you first need to understand how much you spend.
One way to know how much you’re spending is to go through your bank statements line by line.
You could also use popular apps and software like YNAB, Mint, or Personal Capital to automate the tracking process.
Once you know how much you spend on each category, you’ll see where you’d like to reduce your spending.
Create a budget
Creating a budget might sound like a cliche. However, it’s one of the most important financial tools to help you reduce your spending and stop living paycheck to paycheck.
Do not underestimate the power of telling your money where to go. When you budget, that’s precisely what you’re doing.
You’re telling your $1500 to go to rent, $500 to go to groceries, and $300 to go to eating out with friends.
If you’re really committed to stopping living paycheck to paycheck, you’ll always remember that you only have $300 or $150 left on your ‘eat-out’ category and will distribute it wisely, say once a week.
As a reminder, software tools like YNAB and Mint are designed to make budgeting easy for you. You can always check to see how much is left on a specific category before you spend.
Here’s a wise quote by Jim Rohn: ‘Poor people spend their money and save what’s left. Rich people save their money and spend what’s left.’
Wealthy people believe in the strategy of ‘paying their future self first’. Before they spend any of their money on any expenses, they put aside a certain percentage to savings and investments.
Adopt this thinking every time you receive your paycheck. Put aside about 10%-20% of your income into savings, and then limit your budget to what’s left. By doing this, you’re prioritizing your future, and living paycheck to paycheck will soon be a thing of the past.
Have you recognized why you’re living paycheck? The good news is you don’t have to live paycheck to paycheck forever.
It all starts with taking responsibility for your situation to put yourself in a position to make a change.
By evaluating the real reason why you’re living paycheck to paycheck, you see exactly where you are financially, and there’s no more hiding or ignoring.
If you spend way more than you earn, you either have to find ways to reduce your expenses or increase your income.
If you have a spending problem, use the tips mentioned above to help you spend less. Also, check out this article on 6 budgeting tips that really work.
On the other hand, if you have an income problem, use the tips mentioned to increase your income. Beware not to fall into the income trap. When you’re income increases, maintain your spending at the same reasonable levels.