Most Americans now live paycheck to paycheck. While that isn’t exactly breaking news, there’s another layer that is. Half of Americans earning $100,000 or more a year are now living paycheck to paycheck, according to a new report from LendingClub and PYMNTS.com.
The huge jump in inflation is hitting more Americans, including those who earn more. The biggest group affected is Millennials. Three-in-four Millennials — 75% — are living paycheck to paycheck. One-third of the Millennials who live this way and have trouble paying their bills. In contrast, about 56% of Baby Boomers live paycheck to paycheck.
If you’re one of the millions of Americans that devote their entire paycheck to bills and debt, you might not know how to get out of this devastating cycle. Here’s how to get out of it.
Step 1: Discover the cause
Before you can find a solution to your issue, you’ll first need to discover the problem.
“A good way to start is by uncovering the root of your personal financial situation,” says Anuj Nayar, Senior Vice President and Financial Health Officer at LendingClub. “To do this, track your expenses for as little as two weeks to understand exactly where your money is going including whenever money comes in, cash leaves your hand, or what you buy on credit.”
Self-monitoring is a good first step to finding out the type of spender you are. That way you can make the appropriate changes to your spending plan.
Step 2: Build a budget
Once you see where all your money goes, you can build a budget. It can seem daunting to set up, but keep in mind that it’s always growing and evolving. So what you set up today doesn’t necessarily mean it’ll stay like that forever.
Your budget should include how much money you have coming in on a monthly basis, whether it’s from your day job, side hustle, or regular payments through government programs, like Social Security. Include all the sources of income you have.
Then it should include a line for every monthly expense. This includes regular payments like rent or mortgage, utilities, car payments, and loans. But it also includes food, subscription services, home supplies, personal care, and anything else you’re paying for every month. If you pay for things like child support, alimony, or schooling for your child, those will need to be included as well.
Step 3: Adjust your spending
Building and monitoring your budget will show you where all your money goes and then you can make changes accordingly. For instance, if you and your partner work from home, would it make financial sense for you to go down to one car? Even if it’s already paid off, you can lower your car insurance payments and use the cash from the sale to pay off debt or build up savings.
Also think about small changes. For instance, can you lower your monthly subscriptions or how much you dine out? Lowering your expenses and shifting where your money goes takes a bit of time and effort. Making these changes isn’t always easy and in some cases, is very different from your normal routine. But creating and maintaining new financial habits will only be for the better.
Step 4: Create a debt payoff plan
If debt is eating away at your income, it’s time to figure out how to get rid of as much of it as possible.
Take a little bit of time to list out all your debt, including credit cards, loans (car, student, personal), or other outstanding things, like medical bills. Write out how much you owe, the interest rate, the minimum monthly payment, and the due dates. Then pick the repayment plan that works best for you. Some popular ones are:
Debt Avalanche: This is when you pay off the debt with the highest interest rate first. Doing this reduces how much total interest you’ll pay over the course of your debt repayment. You’ll start by making the minimum payments on all your debt, then put any extra cash towards the debt with the highest interest. You’ll do this until the debt is paid in full, then move on to the next debt with the highest interest. Keep this up until all your debt is paid off.
Debt Snowball: This method focuses on the debt with the lowest amount owed. You’ll make minimum payments on all your debt and then put any extra towards the debt with the lowest amount. Once that’s paid off, you’ll move all your payments to the debt with the next-lowest amount. Continue this until all your debt is paid in full.
The debt snowball method is good for those who need small victories as an encouragement to keep going. The debt avalanche is best for those who want to minimize how much they want to pay in interest and can focus on long-term goals.
Step 5: Start saving for emergencies
Saving and paying off debt go hand-in-hand, so consider this step in line with the previous one. You don’t have to finish paying off debt before you start saving money. They can be done at the same time.
Since your budget is always growing and evolving, add a line in there to make contributions to a savings account. Try to find a high-yield savings account where you’ll earn as much as 25 times more than a regular savings account, depending on where you open it.
You don’t have to make huge contributions to your savings; a little bit goes a long way. Start small with $10 or $20 every paycheck. Try to make small goals, like hitting $100, then $1,000, then one month’s worth of expenses. Then three. And just like that, you’re out of the paycheck-to-paycheck cycle.
STICKING TO THE BUDGET YOU SET
Whichever budget you chose, sticking to it is no easy task — but it is an enormously satisfying one. Telling your money where to go each month gives you feelings of control, power and independence. All the good stuff. Start by tracking your spending for a month or two… And then? We’ve got five suggestions to help you nail it here!
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