Are you stuck in the paycheck to paycheck cycle? What would your life look like if you broke this cycle once and for all?
Living paycheck to paycheck is no fun, and it can be so stressful. The smallest unexpected expense can make you feel so much anxiety about your finances.
It’s just not a good place to be. Your paycheck dictates your life, and you have to be very strategic about when you pay each bill and how you spend your money.
The wrong move can send you into overdraft before you even notice it. Living in fear of overdraft is not a healthy way to live.
Living paycheck to paycheck can cause undue stress. The stress can trigger a medical emergency that you can’t cover with your current budget.
As you can see, this is a dangerous cycle.
Studies have shown that as many as 78% of Americans live paycheck to paycheck. I have even been there myself.
The good news is, with a bit of time, effort, and dedication, you can break the paycheck to paycheck cycle despite your current financial situation.
Determine why you live paycheck to paycheck
Before you can figure out how to stop living paycheck to paycheck, you have to figure out if the problem stems from your income or your spending habits.
To get a better picture of your finances, write down the amount of money you bring home every month. If you have irregular income, it’s fine to estimate.
When you have your monthly income calculated, write down all of your monthly expenses. Include everything starting with your mortgage or rent and make your way to things like Netflix and entertainment.
After you have your income and expenses listed, subtract your expenses from your income. Do you have money left over, or are you running out of money during the month?
This exercise will make you realize one of two things about your financial situation.
You will see that you don’t make enough money to cover the number of expenses you have, or you will notice that you make enough to cover regular monthly costs, but your spending habits are out of control.
The thing is, it doesn’t matter how your current financial situation looks. You can create a plan and work towards it to stop living paycheck to paycheck.
Let’s dig a little deeper and talk about the things you can implement to break this vicious cycle.
Break down your expenses
The first step to stop living paycheck to paycheck is to break down your expenses.
You listed your expenses in the first exercise, so now, let’s break these down into categories. The categories are essential expenses, debt payments, and everything else.
The essential expenses include your four walls. The four walls are a concept that I learned from Financial Peace University.
The four walls are food, shelter, necessary clothing and toiletry items, and transportation — your necessities. If you cut expenses to the bare minimum, these things still need to be covered.
Debt payments include any money that you owe. Debt includes student loans, personal loans, credit card debt, car payments, or medical expenses.
A mortgage is technically considered debt, but this expense should be listed as essential since it is part of the four walls.
The everything else category includes any money you spend outside of essential expenses and debt payments.
Expenses included in the everything else category are not mandatory. The everything else category gives you a starting point if you need to cut things out of your budget.
Your life will not fall apart without these things. It will just look a little different.
Determine your spending habits
Now that you have placed your expenses into categories, it’s time to take a look at your spending habits.
Your expenses are split into three categories now. You have to pay the essential expenses every month, so let’s take a closer look at the everything else category.
This category is sort of a catch-all category, so let’s break this up into things that you need and things that you want.
A need is considered essential to your daily life. A want is anything that enhances your everyday life.
Needs are different for everyone depending on your situation.
For example, someone that works from home needs to have the internet. Someone that doesn’t work from home may enjoy having the internet, but they don’t need it.
Pay attention to the things that you have purchased in the last month. Are they needs or wants?
Subscription-based expenses like Netflix and gym memberships seem like small expenses on their own, but when you have three or four of these services, it begins to add up.
If you find an expensive bill, call the company and ask for a discount.
You may not always walk away with a discount, but it doesn’t hurt to ask. There may be a similar package that you didn’t know about that costs a bit less.
Take inventory of the number of wants that you pay for monthly and start cutting out things that you don’t need. You will be surprised at how much money you can free up.
Budget To Zero
Now that you are aware of your actual expenses, it is time to budget to zero. Budgeting is a way to tell your money where it needs to go until the next time you get paid.
Your budget is essential for breaking the paycheck to paycheck cycle. Without a budget, you won’t be able to gain control of your finances.
Grab a pen and sheet of paper or your favorite budget app and log into your bank account.
You are going to do what is called a zero-based budget. A zero-based budget means you will budget (not spend) every penny of the money that you have on hand.
Write the amount of money that you have in your bank account at the top of your paper or enter it into your app.
Next, write down or enter all of your expenses in order of due date. Listing your bills in order will give you a better picture of what you should do before you get paid again. Don’t forget to include your four walls.
When you have all of your expenses written down, start assigning money to them. Add money to each category that needs to be paid before your next payday while subtracting that amount from the number at the top.
Do this until the top number is zero. When you reach zero, you have a successful zero-based budget.
Spend Less Than You Earn
I know this one is a given, but it needs to be said. Spend less money than you earn each month. Spending less than you earn is the only way to break the paycheck to paycheck cycle.
Use your budget to determine the amount of money you have available to spend. Decide what to do with all of the money you currently have available.
If you’re in a position where you don’t have enough money to cover your upcoming bills, assign funds to the bills that you can cover at the moment.
Anything that you still need to pay after that will have to wait. You may need to call a few companies to ask for an extension, and that is ok. The budget will help you prioritize your bills on your next payday.
If you happen to have money left over after your bills are covered, carefully decide what needs to be done with that money before you get paid again.
Use your debit card or cash to cover your expenses. You don’t want to use credit cards since they create additional debt.
Track your spending in your budget every night to keep up with your category balances. Make this a habit, and it will help you spend less than you earn and reach your financial goals.
Boost Your Income
While you are breaking the paycheck to paycheck cycle, you may want to boost your income.
When I say to boost your income, I’m not talking about getting another job (although if you are looking for one go for it). I’m talking about increasing your income with money from side hustles.
Side hustles are a great way to break the paycheck to paycheck cycle quickly.
Do you have a hobby that you enjoy? Your hobby can be writing, decorating, babysitting, or anything else that you enjoy.
Use your skills to start your side hustle. It may be a lot of work, but as long as you enjoy it, it won’t seem like work.
Advertise your services to all of your friends, communities around your city, and local groups online.
The orders and clients will start pouring in, and you will make enough money to pay a few extra bills and create a cushion in your bank account quickly.
If you would rather not have to advertise for your side hustle, you can try your hand at taking surveys for cash.
The pay is not what you would receive from a part-time job, but it is an excellent way to make extra cash and boost your income with little effort.
Save, Save, Save
If you want to break the paycheck to paycheck cycle, you will need to save some money.
An emergency fund of at least $1,000 would be ideal, but anything that you save will be helpful.
When you create your budget, add one line for savings. You should also open a savings account at your bank to hold the money.
After the four walls are covered, add any additional money from your paycheck or side hustle to your savings category until you reach your goal.
Your paycheck will continue to pay the bills as it always has, but since you have boosted your income a bit, you can save a little.
The money that you save will be your cushion. When you get in a pinch or something comes up, this money will be there to help you out.
If you use any of the money that you’re saving while breaking the paycheck to paycheck cycle, replace it as soon as possible. The longer you take to replace it, the easier it will be to fall back into old habits.
The Bottom Line
Life is so stressful when you’re living paycheck to paycheck.
It doesn’t have to be that way forever. The main thing to remember is to boost your income any chance that you get.
Additional income will make all the difference because you will have extra money to take care of things.
If you are still struggling or need a bit more help to break this discouraging cycle, read The Total Money Makeover by Dave Ramsey. This book started me on my journey to financial freedom.
While I don’t follow all of the principals, this book was a great way to jump-start my progress.
If you need help cutting expenses, download the 3 Quick Ways To Cut Expenses worksheet for tips.
What creative ways have you used to break the paycheck to paycheck cycle? I want to challenge you to commit to following these steps for a few months and let me know how it goes in the comments.