I recently found a CareerBuilder.com survey that polled 7,192 American workers about their saving habits. The statistics are alarming:
- 47% of polled are living paycheck to paycheck.
- 21% with salaries of $100,000 or more also live paycheck to paycheck.
- 25% have no savings.
- 40% feel that they need an extra $500 per month just to live comfortably.
I used to live paycheck to paycheck. It is scary, and it feels like a hopeless situation that is hard to escape from.
However, it is possible if you are willing to embrace a few simple strategies to break the cycle.
1) Stop Spending Money
I know this is blatantly obvious, but seriously look at your spending habits and create a budget. Keep track of where your money goes.
Most people will be surprised (shocked, actually) at how much money is spent on just coffee or soda in one year. I never used to tally up our day-to-day discretionary spending, and then put an annual total on it. It’s really shocking to see just how expensive insignificant spending can become.
Don’t just look at daily expenses, but calculate how much these daily expenses cost annually.
The first step to escaping the “living from paycheck to paycheck trap” is to reduce your spending on frivolous things. This might mean cutting back on eating out at restaurants, or you could take a drastic approach and eliminate Cable/Satellite TV, cut back on your cellphone plan, or avoid going to restaurants altogether.
What you want to do is find a happy medium between cutting your expenses while still living a comfortable lifestyle. Your goal is to end the month with a POSITIVE cash flow instead of a “just barely made it”, or worse, negative cash flow.
For me, this meant taking a hard look at what was most important to keep in my lifestyle and purge all the remaining money traps.
2) Build Your Savings Account to $1,000 ASAP
I used to make the mistake of using all of my extra money to pay down debt. This sounds like a good idea for getting out of debt quickly. However, if you do this without first having a sufficient savings account, you will forever remain in debt.
When the car breaks down, or the dog gets sick, or you need to fly out of town for an emergency, you won’t have cash reserves and the unexpected expenses in life will end up on your credit card.
Without a savings account with sufficient funds available, you’ll end up paying hundreds of dollars each month in credit card interest only to maintain a growing balance year after year.
Set a goal of building your savings account up to $1,000 as soon as possible. Go ahead and pay only the minimum payments on your credit cards and loans while you do this.
Don’t worry about interest rates. You’ll just keep paying them for the rest of your life if you always use your credit cards for unplanned expenses.
Cut back on expenses, do side jobs, or sell some items on eBay. Do whatever it takes to build your savings to $1,000.
Also, be sure to set up a separate savings account instead of simply keeping a surplus in your checking account. It’s better to keep that money separate where it will not be so tempting to spend.
Once your savings account is at $1,000, commit to building it further. Set monthly savings goals and stick to them.
I recommend that you try to always have enough in your savings to cover a major car repair, a plane ticket, and an emergency vet bill all at once.
It might take you some time to get there, but either of these emergencies cost less than $1,000 each and having that cash on hand means it stays off your credit card.
3) Prioritize Debt Reduction AFTER Building Savings
Once you have built your savings account to at least $1,000, work on reducing your debt.
There is lots of advice on the web for becoming debt free. Strategies I’ve used in the past included personal consolidation loans and balance transfer offers (be extremely careful with these as promotional interest rates eventually climb back up to high levels).
If your debt has become unmanageable, consider talking with a reputable debt consolidation company. If your debt situation is really bad, declaring personal bankruptcy might be an option, and not nearly as devastating as you might think.
All of the debt-moving and consolidation strategies mean nothing, however, unless you are committed to stop using your credit cards to pay for things.
While you are working on reducing and eliminating your debt, be sure to continue to build your savings.
4) Build A Side Hustle
The next step in freeing yourself from living paycheck to paycheck is to free yourself from needing that paycheck.
You can do this by creating a side hustle. A side hustle is simply a way to generate an income outside of your day job.
You could monetize your skills or start a small side business.
There are a lot of things you can do right now to generate cash if you need to. Offer your skills to businesses and individuals as a freelancer or private contractor. Start a small service business, or create a product to sell.
I left my day job in January 2008 to pursue freelance videography. I earned most of my income from shooting video as a freelancer for three years. Later, I retired from freelance videography and am now working full time from the very blog you are reading right now.
I think a lot of people live paycheck to paycheck because they don’t take control of their own income. When you have zero control over your income, you’re faced with having to make ends meet from the money that is handed to you. You give your financial power over to somebody else.
As we all know, wages are dropping and the cost of living is rising. Besides, what happens when you lose your job? It’s best to have a side project or two that generates revenue and has the potential to be a full time business.
At the very least, pulling in an extra few hundred dollars each month will seriously upgrade your financial situation – as long as you handle that money responsibly.
5) Stop Assuming That Your Paycheck Is Guaranteed
When I had a day job, I rarely had more than a hundred or so dollars in my checking account. I knew that I could spend money and it would automatically re-fill with my next paycheck.
Then I was laid off. It took me nearly two months to find another job. And you know what? I started my new job with MORE money in my checking account than I had when I was laid off.
In fact, Tracy and I have consistently kept a much higher average balance in our checking account since we became self employed than we ever had when we both worked day jobs with steady pay.
When your income is not steady or guaranteed, you tend to hold onto your money. You tend to make conservative financial decisions, which means you hang onto your money and have more cash on hand. And you’re not so desperate for your next pay day.
There is a certain complacency – a false sense of financial security – when the same amount of money automatically flows to you on a set schedule.
But you could be laid off from your job at any time – and hundreds of thousands of people find themselves in this situation every year.
This simple shift in mindset can help you rethink your spending habits.
6) Embrace Frugality (AKA Minimalism)
Frugal living (minimalism) is a requirement if you want to stop living paycheck to paycheck.
Frugality doesn’t mean you have to wear off-brand clothes. It’s doesn’t mean you have to eat rice and beans, or cheap hot dogs for dinner every night.
You certainly do not have to be one of those people crawling under cars in parking lots looking for dropped change.
Frugal living is simply a ruthless approach to how you spend money. Hold off on big purchases until you can buy them with cash. Buy pre-owned instead of new.
Live simply and enjoy your life. Watch less TV and actually LIVE your life and you’ll soon discover that you don’t really need or want a mega-screen TV and 400+ channels of cable. What a cost-savings right there!
The important thing is to remember that frugal living is a temporary strategy while you are building a bigger and better cash flow. It might feel like a sacrifice sometimes.
It can also be liberating. You can always expand your lifestyle later, and it’s so much sweeter to do so when you don’t have to sweat and fret between paychecks.
About Davy & Tracy
Hey there! We're Davy & Tracy Russell, the husband-and-wife team behind this website. We help trailblazers break through barriers so they can turn their passion into their life's work through entrepreneurship. How can we help you?