Do you need to stop living paycheck to paycheck?
According to a survey carried by CareerBuilder a leading job site related to American workers
They collected statistics related to debts, budgeting and living paycheck to paycheck
78% of Americans are living paycheck to paycheck
The survey above is long and detailed but what really grabbed my attention
28% of workers earning between 50 K and 99 K and need to stop living paycheck to paycheck
3 out of 4 surveyed say they are in debt
While in Canada, according to survey conducted by Angus Reid on a sample of 2,047 Canadians
It showed that 53% of Canadians need to stop living paycheck to paycheck
That’s really a devastating news
This brings me to talk about this phenomena and to start with
What is meant by living paycheck to paycheck
Simply this term means you cover all of your expenses with your income
You desperately waiting for the next paycheck usually biweekly to continue to cover your expenditures
You are in a continuous cycle of no money left over and no savings to make
What are the causes of living paycheck to paycheck
Don’t every think that those workers who are broke waiting for next paycheck are those who are on low income jobs
Check above 28% of people earning 50K to 99K are still struggling to make ends meet
Here are all the reasons that cause this phenomena
They don’t include the low income jobs as a cause
Is this a surprise to you? read the first cause about cost of living
Your cost of living is beyond your income
I will always mention this fact over and over from my personal life experience
Me and my wife were living with enough buffer to save and more room to enjoy our lives with a combined income of 52% less than what we currently earn
I know what went wrong, we moved to a bigger place with extra mortgage to pay
Bottom line, check your bills including your mortgage/rent and make your math
I want you to calculate the percentage of your mortgage/rent to your income
I bet you that a few people know their percentages
Banks still lend you for a mortgage that can eat up to 42% of your income
They don’t care if you understand the consequence of your action
What is important now for banks maintaining a safe threshold for borrowers to keep paying their mortgages
Keeping up with the Joneses
Keeping up with the Joneses is Dave Ramsey’s expression from his book Total Money Makeover
What he means is that not all relatives and friends have equal incomes
This is part of life to have filthy rich, rich, middle class and poor people
What is inappropriate is not saying I cannot afford it to friends and families when they ask you to hang out for dinners or pubs so many times more than you can handle it
Or paying for expensive gifts in return of what they bought on your birthdays and anniversaries and you try to complement them the same way
We bought the lie, we lived our lives according to the standards set to “Keep up with the Joneses” and it turned out that they broke and living in debt tooI love this quote from Dave Ramsey’s total money makeover
Saving is not a priority
In other words, you are not paying yourself first
Paying yourself first is the automation of the saving process by deducting a percentage or amount from every paycheck to transfer to another saving account
You don’t do it but ask you bank to set it up for you
All banks can do this automation if you ask them to do so
You are not tracking your spending
Without tracking your spending, it is almost impossible of detecting where your money is spent
You can track your spending by following these 2 steps
Step 1 – if you are initially tracking your expenses for the first time
You need to get all of your credit cards statements for the past 3 – 6 months and investigate where you spend your income
Almost all credit cards companies allow you to save your statements in CSV format
You can open it in spreadsheet application like Microsoft Excel, Libre Office, Google Sheet and Open office
Step 2 – If you already analysed your spending and want to stay up on track
In this case you can use a weekly spending sheet to keep track of your spending
I have made it easy for you as you can download it below for free
Click to download for free from my products page
Not having an emergency fund
Building an emergency fund is very essential, you cannot predict when it will rain
In Dave Ramsey’s Total Money Makeover book
He uses the expression rainy day from his grandma where she used to tell him this quote
You need a coat for those rainy day and it is going to rain for sureDAVE RAMSEY’S grandma quote from TOTAL MONEY MAKEOVER
Although having an emergency where you need to pay for your car repair or for urgent medical or dental bill not covered by your insurance can cause unexpected disruption in your monthly bills
In a typical year expect to have one or more of these urgent unplanned emergencies to pay for
They can put you in debt if you are not ready with an emergency fund
Relying on credit cards for your lifestyle
I am not against using credit cards to pay for your daily expenses
What I do I stick to creating my family budget where I can control myself to use my credit cards to pay for what I planned in my monthly budget
There are people who use their credit cards to pay haphazardly for anything and everything
Not setting any financial goals or plans
The only thing that motivates you to save and help you to achieve your financial goals is setting a clear financial plans
If you have a clear plan, saving money will be priority for you and definitely you will find a lot of room to cut in your flexible and discretionary expenses
How to stop the cycle of living paycheck to paycheck
Create your family budget
Don’t be afraid from the term budget, just think about it as a spending plan
If you like the spending plan term, they are the same
I made it super easy to build spending plan for your household income
Just get a cup of coffee, tea or whatever drink you like, follow the link above and give it only half an hour
Finally you will be set to overcome the fear of creating a family budget
Build an emergency fund
I discussed in a previous post how to build an emergency fund as fast as possible
If you have debt to fight, you need at least the baby step for saving $1,000 for an emergency fund before you move to your next debt step
Sell belongings you don’t need
You want to complete the emergency fund step as soon as possible
If it requires to sell few of your belongings like a precious watch or rug in your house using Facebook Marketplace, Craigslist or even eBay
If you scan you house, definitely you will find so many stuff to sell for quick cash
Get rid of your debt
If you still have not built your emergency fund yet
I ask you to do so before you start fighting your debt
If you are paying few loans and credit card debts monthly, I want you to think for a moment how to stay motivated and encouraged to continue paying your debt
The best way to achieve successful result is to sort all of your debts from smallest to largest regardless of their interest rates
It is called the snowball effect, start by paying small debt first when you finish it, move the energy towards the larger debt in line
What is more important in the snowball process is to get rid of anything causing some of your debts to stay like selling your luxurious car instead of paying its loan
Increase your income with side hustle
You may be on low income and that’s why it is tight with you
But are you going to stay like that for a long time?
I always believe to some extent that earning more money is based on what you know and not based on your college degree
For example, I knew lot of people who used to work with minimum salary and they insisted to study for few months to change their future
It is out of topic to discuss that but there are so many certificates that can definitely move your career to the next level like project management or CMA
Please read my post how to make 200 dollars a day to get more ideas of income you were not aware of
Live below your means
Sometimes the problem lies in the way you live and spend your money
I discussed earlier some people are paying more than 42% of their incomes for mortgage/rent
There is nothing wrong if you are very tight and single to live with your parents and pay for your room
Or if you don’t accept it, downsize your rent or find a roommate
Cut from your expenses
Expenses are categorized into fixed like mortgage/rent and insurance, flexible like groceries and discretionary like your morning take away coffee
You have to sort out all of your flexible and discretionary and sacrifice some of your expenses to save money for the future
Start saving for your retirement
Time flies and you have to plan for saving up to 15% of your income for retirement
If your company matches up to 6% of your contribution then saving 6% you get 12% saved in your retirement saving account, you have no excuse to save the 15% now
If not, do your best for reaching the 10% saving into a retirement saving account invested in long term mutual funds
How to save money and stop living paycheck to paycheck
If you expect to read something super duper natural on saving money with low income
Unfortunately you will read a regular grandma’s advice like
The reverse budget method – Pay yourself first
The reverse budget method is also called pay yourself first because your prioritize your saving plans over other items on your spending plan
Sometimes it is called spending plan after saving
I will add here my little twist regarding how to pay yourself first
On your paycheck day, money goes into your checking account
If you arrange with your bank to auto transfer any amount to a saving account
You would be tempted to take the money back from your saving account to avoid that you have to set an auto transfer to mutual fund saving account
Instantly your new allocated amount will be used in buying mutual funds shares where you need to keep the money for long term
Apply the half payment method
This half payment method is very easy to apply and it helps to save money too
Take all your fixed bills like mortgage/rent, car and home insurances, car loan, electricity and heating gas – based on the last 3 – 6 months average and divide all of them by 2
For example if mortgage/rent is $800, car insurance is $150, electricity is $60, heating gas is $100 divide them by 2
If your biweekly income is $1,800 then deduct $400 for mortgage/rent+ $75 for electricity + $30 for electricity + $50 for heating gas = $1,245 leftover
The half payment method helps you to manage your income properly as all bills are deducted monthly and you get paid biweekly
You will be able to save money because if you have your bills distributed throughout the month
You may have one paycheck goes to bills and next paycheck your priorities will be messed up
But if you plan to equalize your paychecks by deducting the portions that go to bills
You will have paychecks with equal amount to manage
The cash envelope budget method
The cash envelope budget method requires you to stop using your credit cards and replace them with cash for all money you assigned in your budget for flexible expenses like groceries
Once you finish the cash in any envelope you stop buying it, you have to be very diligent and manage to count what is left in your envelopes to make sure you have enough cash to cover your expenses
It is between you and me
I attempted working with the cash envelope budget method before but I couldn’t adapted it in my lifestyle
I monitor my credit cards cautiously to avoid any deviation to my budget plan
Conclusion on how to stop living paycheck to paycheck
It is never too late
Everyday of your life you have a chance to save money for the future especially for your retirement
Don’t count on your government for the pension amount you will get
Start today by learning how to create your household budget and building an emergency fund