Are you wondering how to stop living paycheck-to-paycheck? Overall, 61% of Americans now say they are living paycheck to paycheck, according to new data from LendingClub. Additionally, those of us who are high earners — earning $100,000 or more per year — aren’t immune to monthly budgetary struggles. In fact, this demographic is struggling even more today: 49% of those earning six figures or more reported living paycheck to paycheck.
So, what gives? Inflation is certainly a factor. Rising prices for everything from food to fuel, among other factors, have squeezed the budgets of Americans at most income levels. “The cost of everything has gone up so (people) are having to make some pretty difficult tradeoffs,” says Anuj Nayar, LendingClub’s Financial Health Officer.
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Those living paycheck-to-paycheck often have little to no savings, and could face a financial crisis if they lost their jobs, which are typically their only source of income. That’s why spending everything you earn every month is so problematic: it doesn’t leave anything left to cover life’s little (or big) emergencies that can pop up. No one should put themselves in a position where unexpected dental work or a car wreck can lead to financial ruin.
Here’s a look at how to stop living paycheck-to-paycheck, and finally break the cycle.
SAVE AS MUCH AS YOU CAN, WHEREVER YOU CAN
How can you stop living paycheck-to-paycheck? The best way to do this, finance experts say, is to track where you are spending and then start to save something, starting now. “We encourage everyone to take a very hard look at their expenses and start putting something toward a savings account – even if it’s only $10 a week,” Nayar says.
“Start where there’s wiggle room,” says certified financial planner Nycole Freer, the founder of Eden Financial. “You can start small so you’re not overcommitting. Start with $50 a month and start building that (savings) muscle.” One of Freer’s current clients is living paycheck-to-paycheck and wants to stash cash away to help pay for college for her children. For now, she’s begun reducing the number of times a week the family goes out to eat or orders take out.
BUILD A BUDGET
One of the quickest ways to get control of your finances is to create a monthly spending plan, or go back to one that worked for you in the past. “I feel like you kind of have to learn these things and not everyone teaches you,” says Freer. “Most people weren’t taught how to make a budget. I didn’t learn until after college.”
Freer, who has been budgeting for about a decade now, uses an app to track her spending. “It’s linked up to my credit cards and every transaction comes through and goes into a category so I can keep an eye on it.” She reviews the app weekly and uses it to tidy up her expenses at the end of each month.
For a new budget to be effective, Freer suggests looking back through three months of financial statements (bank and credit union accounts, credit cards, Venmo, etc.) and seeing where the money is going. She suggests putting it down on paper to make it more real. For more on how to create a budget, check out these ideas. If you’re looking for a little more hands-on help with your money — with a dedicated money coach and a class full of accountability partners— then we’d love for you to join our 8-week FinanceFixx course, which can help set you on a better financial path.
CONSIDER AN AUSTERITY BUDGET IF YOU NEED TO CUT BACK EVEN MORE
The budget that you have today is based on a certain level of earned income — but if your level of income changes during a recession-induced job loss, then it’s time to create a new budget that meets you where you are. An austerity budget — a budget that’s pared down to cover only your barest of necessities, with no frills — is where you’ll need to start.
The goal is that an austerity budget helps you control your expenses and maintain financial stability during challenging economic times. To create one of your own, start by reassessing all your monthly expenses and prioritizing your essentials, such as housing, utilities, groceries, healthcare, and transportation. These line items will be your budget’s only priorities until you’re able to secure additional income. The goal is that by paring down to the necessities, you’ll be able to cut out discretionary spending for things like dining out, entertainment, subscription services, or other non-essentials like those checkout line impulse buys.
Austerity budgets aren’t just for people who have faced a job loss. Many people who simply want to save as much as they can, or who may be worried about a future reduction in income will often look to craft a strict budget to ensure their financial futures are stress-free. And at the same time you make budget cuts, you’ll also want to keep an eye out for cost savings with your essentials. For example, you gotta have groceries, but you can shop first at the discount grocer or dollar store, use coupons, shop sales, and make swaps for cheaper alternatives (like generic vs. name brand).
START AN EMERGENCY FUND
One of the worst things that can happen during a recession is you lose a job and you don’t have enough cash on hand to make it through the downturn without selling your stocks at a loss. In other words, you don’t want to have to dip into your retirement funds in order to make it through a lean period. The best way to make sure you’re ready to handle a possible downturn is to build an emergency fund, explains Jason Preti, certified financial planner at Unleashed Financial LLC.
Most people should look to set aside 4-6 months worth of living expenses in a dedicated fund for emergencies, Preti explains. When you think about what falls under the category of “living expenses,” consider all the basics that you need to run your life comfortably. This includes money for rent or mortgage, food, healthcare, and things like utilities, gas, and a cell phone bill. Essentially, you want to be able to keep a roof over your head and the lights on no matter what the economy throws at you.
Look to save something every single month if you can, ideally automatically. Saving every month works so well is because the money is there when you need it. Sometimes, you may not need it for a year or more. Then, the wheels fall off.
“While the nature of an unexpected expense could change,” Nayar notes, “you will have something happen that will completely derail your budget a couple of times a year. It’s a fact of life. The more you can shy away from putting expenses on a credit card – rates are now at record highs and balances are now at record highs – the better.”
YOU HAVE OPTIONS
People always have options to tackle their debt so they can beef up their savings, Nayar reminds. “You can also take all those high-interest credit cards and put them into an installment loan – that way you know how much you will be paying each month. Getting yourself debt free is one of the hardest, but one of the most important things we can do.”
If high-interest debt is an issue, one option could be seeking help close to home. The National Foundation for Credit Counseling at NFCC.org is a good resource for finding a counselor in your area.
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