We don’t have to tell you this if you’ve ever been (or are) in this situation, but living from one paycheck to the next makes peace of mind an elusive goal. Thirty-eight million American households live this way, spending all of each paycheck, according to recent research from the Brookings Institution. While many of these households have assets such as their own homes or retirement accounts, they have little or no extra cash on hand.
“Car accidents happen. Sudden job loss happens. Natural disasters happen. What do you have to fall back on if the unforeseen happens?” says Sylvia Flores, director of marketing at The Online 401k, who recounted her struggle to break the paycheck-to-paycheck cycle in an essay published earlier this year.
From a financial perspective, living from paycheck to paycheck is disastrous, “and it’s not stable from an emotional standpoint, either,” says Kathryn Garrison, senior financial advisor at Moss Adams Wealth Advisors. “Debt has a way of snowballing and your stress snowballs right along with it.”
It’s time to break the cycle — now. Here are six ways to do just that.
Pretend You Earn Less Than You Do
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While it may be easier said than done, simply committing to live on less than you earn is the first step toward breaking the hand-to-mouth cycle. If you just spend less than you earn after taxes, you will have “a budget surplus,” Garrison says.
Once you start having money left in the bank at the end of every pay cycle, you’ll begin to feel a little freer. You can begin stashing away some savings so you’re prepared to handle the inevitable rainy day. “Living slightly below your means and having an emergency fund set aside prevent that cycle from starting and will give you a surprising amount of peace of mind,” Garrison says. (Start small but aim to eventually set aside at least 10 percent of your paycheck. Setting up automatic transfers to your savings from each is often the easiest way to stick with it.)
Create a Budget
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To live below your means on an ongoing basis, you must know where your money’s going. Start by creating a realistic budget if you don’t have one already. Flores recommends using Google Docs (it’s free), which allows you to create a spreadsheet and share it with other spenders and contributors to your household income. If you don’t want to create one from scratch, Google offers a list of free budgeting spreadsheet templates here.
In addition to Google Docs or a simple Excel spreadsheet, more sophisticated online budgeting tools like mint.com will pull in all your financial information and send you alerts and notices, and “they can make budgeting a rather cool exercise,” Garrison says.
Build an Emergency Fund
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Even if you start very small, it’s vital to begin setting aside savings to build up an emergency fund. Review your budget and break it down into non-discretionary and discretionary expenses, Garrison says. Non-discretionary expenses include rent or mortgage, groceries, utility bills and insurance payments. Discretionary spending includes eating out, entertainment, clothes and shoes.
Once you’ve broken your spending into categories, cut some of that discretionary — even if it’s only $100 per month — and set it aside in savings, Garrison says. “Be realistic about what you can cut so you don’t get discouraged, and start small if you have to. If you haven’t been budgeting, you may be surprised at where your money is going and that in itself may be enough to help you curtail your spending.”
Consider Downsizing
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If your discretionary spending is already extremely low, it may be time to consider making a lifestyle change. That may mean moving to a cheaper house or apartment, dropping the expensive gym membership and opting to walk or jog in a nearby park, or trading in an expensive car for something with less flash and better gas mileage.
“Moving into a smaller apartment or house might seem depressing, but the upside is a more balanced budget and the peace of mind that brings,” Garrison says. Not to mention less housework and yard work to do.
If you have significant debts hanging over your head, that is likely to be a chief reason for your paycheck-to-paycheck existence. Make a commitment to start getting out of debt immediately. It may be a long-term commitment, but slow and steady wins the race.
“In my experience, maintaining all of the debt minimums but one helps me to gamify the process as I attack that one until it’s paid off,” Flores says. “Once that one’s paid, then you can move on to the next one. Rinse and repeat.”
Don’t Forget Your Future
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If you have access to a 401(k) or IRA at work, take advantage of it. “Trust me, the money comes out of your account before you even know it’s gone,” Flores says.
She recommends 3 percent to 4 percent, increasing your contribution as your comfort level grows. And if there’s a company match, take advantage of it. “Otherwise you’re leaving free money on the table,” Flores says.
In addition to a regular contribution, “each time you get a pay raise, allocate a portion of it to increasing your 401(k) contribution and a portion of it to your savings account,” Garrison says. If you take savings out of those salary increases, you won’t even have time to miss it. But it will be there when you need it.
