How to Not Live Paycheck to Paycheck
The idea of living paycheck to paycheck is a popular personal finance talking point and an unfortunate reality for many people. Like credit card debt, living paycheck to paycheck can be a personal finance trap that keeps you from building proper savings for future financial stability. Today, we are going to discuss what living paycheck to paycheck means and how you can prevent yourself from falling into that lifestyle.
Living paycheck to paycheck describes the situation where an individual or household has just enough income to cover their basic expenses such as rent or mortgage, utilities, food, transportation, and other necessities until the next paycheck arrives. There is little to no financial cushion or savings to cover unexpected expenses or emergencies. This can lead to financial stress and insecurity as any unexpected expenses or changes in income can create significant financial hardship.
If you are determined to not live paycheck to paycheck, there are three things that you need to examine: your savings, your income, and your expenses. Each of these things contributes to whether or not you are dependent on that next paycheck to maintain your current lifestyle.
Savings - Having a savings account provides a safety net for unforeseen expenses, emergencies, or unexpected financial setbacks. It is important to regularly contribute to savings, even if it is a small amount, to build up a financial cushion that can help you to avoid relying solely on your paycheck to cover unexpected expenses. Without savings, individuals may be forced to take out loans or credit card debt to cover these expenses, leading to a cycle of debt and dependence on their next paycheck. Having a savings cushion built up is both the first step in preventing a paycheck to paycheck lifestyle as well as the last step in escaping one.
Income - If an individual's income is not sufficient to cover their expenses, they may find themselves struggling to make ends meet and constantly relying on their next paycheck. Increasing one's income can be accomplished by seeking out better-paying job opportunities, negotiating a higher salary, or taking on additional work. While this isn’t something that most people can change immediately, it is something that should be understood as a long-term contributing factor to their desired lifestyle because ultimately, income exceeding expenses is what creates personal financial stability.
Expenses - Your expenses are most likely the thing that you can immediately change to improve your situation. Expenses can be broken down into two categories: essential and non-essential. Essential expenses include things like rent, utilities, food, and healthcare, which are necessary to maintain a basic standard of living. Although essential, most of these categories can be changed to fit your lifestyle. For example, I would not suggest getting all organic foods from a luxury supermarket while living in an apartment that costs more than half of your monthly take-home pay. Non-essential expenses include items like entertainment, dining out, and luxury items, which are not essential to daily life. These categories tend to be more easily changed because they can be eliminated almost immediately in most cases. Examining one's expenses and identifying areas where spending can be reduced can be an effective way to free up funds to put towards savings or to cover essential expenses. It is important to create a budget that prioritizes essential expenses (while getting a good amount of value for them) while cutting back on non-essential ones to avoid living paycheck to paycheck.
In short -
Build up savings. Emergency funds are essential!
Make more money. Having a higher income gives you more flexibility!
Spend less money than you make. Live below your means!
It’s important to note that none of the above examples was tied to a certain dollar amount because even those making over $100,000 can fall into money and lifestyle traps that keep them living paycheck to paycheck. In fact, a recent study by CareerBuilder found that nearly one in 10 workers making over $100,000 a year live paycheck to paycheck. Now that you understand the basics behind living paycheck to paycheck, hopefully you can take the time to set yourself up for success with an emergency fund and an examination of your income and expenses.