Over 46% of Americans said in a recent Federal Reserve survey that they would struggle to pay for any emergency over $400. GoBankingRates found similar results in their survey that found 69% of Americans have less than $1,000 set aside in savings.
Millions of Americans live paycheck to paycheck. According to a CareerBuilder.com survey, 78% of all Americans live paycheck to paycheck, and the number seems to keep rising each year.
And, living paycheck to paycheck isn’t just confined to the poor and middle class either. Almost 10% of Americans who earn $100,000 or more live paycheck to paycheck with almost no savings according to the survey. Nielsen puts the number closer to 25% of families who earn $150,000 or more are living paycheck to paycheck, and almost 33% who earn $50,000 to $100,000 in income each year are doing the same.
Why So Many Live Paycheck to Paycheck
Living paycheck to paycheck is a cycle, and it’s a hard one to break. People feel trapped. Many people are living for each paycheck because of the cost of living is so high where they’ve chosen to live. Or, maybe they’ve got a lot of student loan debt. Or, maybe their credit card debt is out of control.
The Federal Reserve recently announced that the total household debt climbed in the United States to an astonishing $12.73 trillion in 2017. That’s more than the debt right before the start of the Great Recession in 2008. While most of our debt is mortgages and student loans, credit card debt added up to over $1 trillion of the total $12.73 trillion.
How to Break the Paycheck to Paycheck Cycle
It’s not easy to break the cycle of living paycheck to paycheck. Like most things, it takes time and effort. But, with dedication and focus, you can break the pattern. Here are three ways that you can take back control over your finances and gain some breathing room each month.
Stick to a Budget
One of the biggest reasons people are living paycheck to paycheck is because they don’t stick to a budget, or they don’t even have one. You have to have a monthly written budget for your family’s finances. You need to earmark every dollar that you earn in your budget. Every family should create a budget and have at least three to six months of living expenses set aside in case of an emergency. Having an emergency fund will allow you to stop reaching for your credit cards every time there’s a crisis.
Maybe you’re spending your money on wants like eating out at restaurants or going to the movies instead of your needs such as debt repayment, insurance, and savings. You have to take a hard look at your budget and find places that you can cut back. Maybe you don’t need all of the premium channels on your cable? Or, can you completely cut the cord on your cable? Maybe you don’t need the newest iPhone and the massive cell phone bill that often goes with it. Getting on a monthly budget is the first step to taking control over your finances and getting off the cycle of waiting for your paycheck to roll around again on Friday.
Increase Your Income
Everyone always talks about reducing your spending to get control over your budget. But, they always forget that there are two sides to the equation. If you increase your income, you’d actually be able to leave your spending patterns the same. But, increasing income will allow you to start saving money and building up your emergency fund.
You may want to consider taking a second job or even a third job if necessary to pay off your debts and start saving money. Is there a pizza delivery job in your town that you can take at night? Could you make things and sell them on Etsy? Do you have junk lying around your house that you could sell on eBay? These are just a few of the examples of part-time jobs and side gigs that you can use to find extra income. A second job doesn’t have to be a career, and it doesn’t have to be permanent. It’s just until you get back on your feet.
Payoff Debt
Finding ways that you can break the paycheck-to-paycheck cycle is critical to your family’s long-term financial health. Increasing your income may be one option, but reducing your expenses and paying off debt is the fastest way to break the cycle of living paycheck to paycheck.
Many people don’t even realize just how much money they owe to their credit card companies, student loans, car loans, mortgages, and a host of other debts. Understanding your balances and their interest rates is the first step to paying off your debts. You should make a list of all your debts, their balances, and interest rates.
Then, you should create a debt snowball plan to pay them off. A debt snowball is a repayment plan that attacks the debt with the smallest balance first. Throw all of your extra income from your new job or extra money from cutting out things in your budget at this debt until it’s paid off. Of course, you should continue to make the minimum monthly payments on all of your other debts as well. Then, once the first debt is paid off, take the extra money from your budget and the minimum monthly payment you were making and attack the next smallest debt balance. Continue paying off each debt this way. And, your snowball should build as you add other minimum monthly payments from the next debt, and it will build like a snowball headed downhill. Creating a debt snowball is baby step two from Dave Ramsey’s Total Money Makeover.
Living paycheck to paycheck is a devastating cycle. It’s hard to break. But, you can do it. By having an emergency fund, increasing your income, paying off debt, you can gain some breathing room. That’s what it’s all about.
You need breathing room in your financial life to be able to stop living paycheck to paycheck. And, these three ways above will help you get it. It’s not easy to break the cycle. But, it’s not impossible either. It just takes time, energy, and focus.
