"How to Break the Living Paycheck-to-Paycheck Cycle" by @lifehacker
We talk a lot about personal finance here at Lifehacker. But if you're living paycheck to paycheck, getting out of debt and starting a successful budget may seem impossible. The Simple Dollar's Trent Hamm has been there. Here's his advice on how to break the cycle and live a happier financial life.
Out of all of the blessings that have come into my life over the last two and a half years or so, the one that has truly helped me to sleep better at night is the move away from living paycheck to paycheck. Paycheck-to-paycheck living happens when you are regularly waiting for your next paycheck before you make basic financial moves, like paying bills or buying food or doing something fun. It’s incredibly dangerous for a number of reasons.
If you lose your job, your life requires you to find a replacement job immediately. Thus, you’re completely dependent on your current job. You can’t sustain even a few days without that regular paycheck coming in. Quite often, your boss knows this and takes advantage of it, because they know you can’t function without that job–this, in the end, makes your job completely miserable and makes it dominate your life.
You can’t plan ahead for disasters. Whenever something bad happens, like a car breaking down or a child needing emergency dental work, your only choice is to bust out the plastic and then sweat it over the next several months as you fight to pay down the balance. If you’re relying on each subsequent check to even manage your day-to-day life, you can’t plan ahead for these unfortunate situations. Instead, the best you can hope for is some good “luck” in that they won’t occur too often.
You can’t plan ahead for bigger things, either. Dreaming of a big family vacation? How about a new car, or a new house? If you’re living paycheck to paycheck, these dreams are simply unreachable in the foreseeable future. You might really want these things for your family, but they’re unattainable with your current financial structure.
So what’s the solution? The solution is obviously to back slowly away from living paycheck to paycheck, but it’s not always easy.
Recognize That There’s a Problem–and That You’re Not Alone in Dealing With It
I was in these very shoes once upon a time, waiting for that next paycheck to come in so I could cover the required bills and then spend some more. I racked up five figures in credit card debt and it got so bad I spent a very long night holding my infant son and wondering how I would ever fix things.
Living paycheck to paycheck is a problem of your own creation. But you’re not alone in creating that problem, and if you put your nose to the grindstone, you can get out of it and start moving towards financial prosperity. Use the internet–or your own social network–to find out about the experiences of others who turned their ship around and share your thoughts and difficulties anonymously. You’ll find it much easier to work through this tough process.
Look for Regular Expenses You Can Trim Away
The first big step is to trim your monthly expenses. Reduce that cable bill and that cell phone bill. Get rid of unused memberships, like gym memberships or country club memberships. Look for ways to tone down your home energy use. Start a carpool or start using public transportation. Start cooking at home more and eating out less. All of these things will ease the monthly pressure on your wallet, allowing you to stop feeling like you’re falling behind and instead start getting ahead a little.
Don’t Shop for Entertainment’s Sake
When you’re hanging out with friends, it can be tempting to go shopping for clothes or hit the electronics store. Don’t. Find anything else to do. Shopping for fun in a social environment is costly even if you don’t buy anything, because you’re surrounded by temptation and the mental imprintings of stuff that you want but don’t really need. It’s an excuse to talk to your friends about stuff you want and potentially talk yourself into purchases, either now or later. Just stay away.
Cap Your Non-Essential Spending Each Month
We all spend some money on things we don’t really need. Instead of just spending as opportunities arise, put a cap on that spending each month. Allow you and your spouse a cash allowance each month and agree that your discretionary spending comes from this cash and this cash alone. Make the amount lower than what you normally spend, but not enough lower that you’re tempted to cheat. Then, when you’re used to the amount, consider lowering it a bit more until you find a sweet spot of savings and fun.
Don’t Use Your ATM Receipt or Check Ledger as “Permission” to Spend
If you’ve ever looked at an ATM receipt or at your checkbook ledger to find out if you can afford something, the answer is that you can’t. Don’t even bother to look. You can’t afford it. Looking at that receipt and then going ahead with the purchase is nothing more than an agreement that you want to continue living paycheck to paycheck. If you’re tempted to peek or to use your balance as justification that an unnecessary purchase is okay, you’re perpetuating living paycheck to paycheck. You’re choosing to be chained to your desk, at the mercy of your boss.
As You Gain Some Breathing Room, Move Towards Paying Bills Right When They Come In
One thing that many people living paycheck to paycheck waste money on is late fees. You’re a couple days late on a bill because you were waiting around for your paycheck, so you’re dinged for an extra five bucks. It used to happen to me all the time—and it was a serious money leak. The best solution for handling this as you move towards financial stability is to start paying your bills as soon as they come in–that way, you avoid the late fees by a mile. Later on, as you get more comfortable, you can develop your own bill-paying routine–I pay mine monthly–but the best way to handle things just as you’re getting some cash built up in your account is to pay bills ASAP.
Don’t Carry More Than One Credit Card With You
Leave the rest at home. The only reason you should be carrying a credit card in your pocket is to cover emergencies or for specific purchases. Thus, carrying more than one credit card in your wallet is not only an identity theft concern, it’s also temptation to spend more than you should.
I personally have three credit cards. Two of them are for specific purchases only, so I leave them at home. The other is my general use card, and it’s the only one that resides actively in my wallet. Because I recognize that I need to keep a healthy free balance on it for emergencies, it makes the temptation of the plastic much lower.
Work Together with Your Spouse and/or With Your Family
Walking a new financial path isn’t easy. It’s like a diet–it’s a new set of routines and it can be difficult to get used to a new walk. The best way to make it easier is to ask for help, and the best place to ask is your spouse. Work cooperatively with your spouse to cut spending and get in a better financial routine.
If you’re single, try to find a “money buddy,” as suggested by the excellent book Money Drunk, Money Sober. Basically, this is a person that you can work in tandem with to overcome your financial challenges and spending issues. By opening up to this person (and allowing this person to open up to you), not only will you find an outlet to talk things over, you’ll also cement an already-strong friendship.
Downgrade
One major step you can take in getting away from paycheck-to-paycheck living is to downgrade. Do you really need that gas-guzzling car when an efficient one would do? Do you really need that big of a house? Consider moving to a smaller or more efficient version of these things. It’ll lower your monthly bills, eliminate some debt, and quite likely directly put some cash in your pocket.
This is a major step for many people and it’s often one that gets inside the comfort zone. “I’ll NEVER do that,” you’ll think to yourself. Instead of just automatically rejecting the idea, think about it more seriously for a little bit. Think of how much easier life would be without a car payment or with a smaller house payment. You might find you don’t need the things you think you need.
Learn Some Basic Skills So You Can Deal With Emergencies Yourself
Get a book or two like the Reader’s Digest Complete Do-It-Yourself Manual, Fix-It-Yourself Manual, or the Popular Mechanics Complete Car Care Manual and learn how to do basic maintenance and repair yourself so you’re not turning to an expensive repairman every time something little goes wrong. Not only that, you can often do basic maintenance like oil changes and air sealing your home yourself without nearly as much effort as you might think. This cuts way down on expenses and doesn’t leave you at the mercy of “emergencies” quite as much as before.
Good luck. Breaking free from the paycheck to paycheck cycle is one of the most mentally relieving things I’ve ever done. I hope you’ll do it, too.
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