3 Ways You Can Stop Living Paycheck-to-Paycheck

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Saving money for retirement or buying a house can seem like a pipe dream for people living from one paycheck to the next, just trying to stay caught up on their bills.

The “paycheck-to-paycheck cycle” means every paycheck you receive barely covers all of your regular financial obligations, like student loan repayments, car loans, rent and groceries. Living this way puts you at greater financial risk, as a job loss or an unanticipated expense like a major car repair can put you in a real tough spot.

If you’re living paycheck-to-paycheck, you’re basically living without a financial “safety net.” In addition, it’s tough to really enjoy yourself if you’re constantly worrying about where every dollar goes. Here are three ways to get started on the right track.

1. Create a monthly budget

Keeping track of what you earn versus what you spend can give you a clearer picture of your finances. It can also help you identify any unnecessary expenses that can be reduced or eliminated. (Do you really need that venti Caramel Frappuccino every day?) Cutting expenses means you might be able to save a little each month and depend less on your next paycheck.

Start by calculating your total monthly income, which will come primarily from your full-time job, but may also include income you earn from freelancing or a second job. Next, determine your total monthly expenses, which include payments on car loans and insurance, rent or mortgage payments, credit cards, student loans, utilities, groceries, entertainment, health insurance and dining out.

Once you’ve figured out both, subtract your expenses from your income. This figure is your monthly cash surplus, and the higher, the better. If this number isn’t positive, it means you’re either breaking even or losing money each month and living paycheck-to-paycheck.

A general rule of thumb is to have your income exceed expenses by at least 10%, and save the difference. So if you earn $3,000 a month, your expenses shouldn’t exceed $2,700, which leaves you with an extra $300 per month.

Track your budget with a simple Excel spreadsheet, with a pen and paper, or with FinanceWorks™ in Online Banking.

2. Trim expenses

While you may not be able to control the amount of money you earn, you can certainly control the amount you spend.

The first area to target is discretionary expenses, which refers to things you can live without. Ways to cut these expenses include dining out less often, buying less clothing at high-end retailers, reducing your cable package or eliminating it, and getting rid of unused gym memberships. If you eliminate just high-priced coffee drinks from your budget, you might find you have an extra $100 or more per month.

If you have some money in your savings account, but also have high-interest debts like credit cards, consider paying off the debts in full.

If you don’t have the means to pay off high-interest debts in full, consider consolidating them into one new loan at a credit union. Consolidating debt means you pay off several smaller loans with one new larger one. This can save you money on interest if you receive a lower rate than those on your existing loans, plus it may help you pay off the debt faster. It could also help you better manage your debt, as you’ll only have to worry about making one monthly payment instead of several.

3. Pay yourself first

Paying yourself first means a portion of your earnings is automatically directed to your savings before you’ve even spent a dime on rent, groceries, utilities, clothes or car payments. Most people do exactly the opposite: save whatever money is left over after all bills and expenses are paid.

The key to paying yourself first is saving an amount that you’ll feel comfortable with. You don’t want to save so much that you’ll be left with no money to pay the bills. Instead, try starting with a relatively small amount that you know you can afford, like $200 or $300, and then look for ways to increase the amount in the future. So if you know that your monthly expenses will total $2,500 and you will earn $3,000 in after-tax income, you may choose to route $200 into a savings account each month, leaving you with $2,800 to pay for all expenses.

By developing good financial habits at an early age like paying yourself first, creating and maintaining a monthly budget, and limiting unnecessary monthly expenses, you can break the paycheck-to-paycheck cycle.

Steve Nicastro writes on personal finance for NerdWallet. This article was provided compliments of NerdWallet.com, a consumer finance news and comparison website committed to helping you save money.
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