Living paycheck to paycheck is stressful and risky. If your bills and debts are up to your eyeballs, a slight change in your income can drastically change your life. And in case you missed it, inflation is rising at a record rate. Nobody dreams of living their lives paycheck to paycheck, but the American consumer statistics will shock you.
But, if you follow a few simple steps, it does not have to be that way.
One hundred twenty-five million U.S. adults have little to no money to save. That means 54 percent of Americans are living paycheck to paycheck.
And that's not just folks below the poverty line or making minimum wage.
One in every two Americans earning between $50,000 and $100,000 annually also live paycheck to paycheck. The study shows that 18 percent within that income bracket struggle to pay their bills. But even thirty-nine percent of consumers with an annual income of over $100,000 still live paycheck to paycheck.
Living Paycheck to Paycheck
So what does it mean to live paycheck to paycheck?
It means spending all your income every month. Regardless of your earnings, if your costs are higher than or equal to your income, and you struggle to save anything at all, you're living paycheck to paycheck.
How Did It Become a Normal Lifestyle?
Lifestyle inflation drives people toward living paycheck to paycheck – spending more when your income increases keeps you strapped for cash.
“Think of all the devices and services we pay for now that connect to the internet. Is streaming a necessity? Bluetooth in your car?” says Jay W. Rishel, CFP with Overman Capital Management. He mentioned that the idea of a “necessity” has changed. The number of necessities has inflated too.
How Can You Still Save Money?
The two main financial problems that force people to live paycheck to paycheck are income and expense problems. You must solve these two issues to save money.
#1 Solve Income Problem
You'll have nothing to save if you don't earn enough. You have an income problem if you're struggling to keep up with life with no other expenses besides the bare minimum necessities like food, shelter, utilities, and transportation.
Increase income at your current job by adding extra skills or if you have to, picking up a side hustle. If you're willing to put in your time and effort, there are many ways to bring in extra income. For example, people are making money selling feet pictures, literally.
#2 Solve Expense Problem
High earners struggling for cash have expense problems. They're spending too much money beyond their basic needs.
“Regardless of income level, savings has more to do with mindset. The key to good financial habits is consistency and commitment. Starting small is okay because it forms a habit. Then they can reduce expenses, increase income, or both. They are more likely to increase their savings,” says Schuyler H. Lemler, Financial Counselor with Apothecary Financial.
Financial Coach Melissa Mittelstaedt recommends looking at two to three months of spending to get the average monthly expenditure. Then, you can compare it to income and review to see if you're blowing up your finances.
How To Do It the Right Way?
The half of the U.S. population who have been living paycheck to paycheck are doing it all wrong.
But there is a right way!
You can continue living payday to payday, but you must also build necessary budgets like sinking funds, retirement, investment, and emergency fund into the expense category.
You can implement a zero-based budgeting concept where incoming cash equals outgoing money. The outgoing money should consist of basic needs plus savings for financial goals. The monthly net zero budgeting approach resembles the paycheck-to-paycheck life.
Zero-based budgeting (aka living paycheck to paycheck the right way) is one of the most highly effective wealth-building strategies. Assigning every income dollar a task leaves no room for impulsive purchases.
Follow the steps below to achieve your financial goals.
Setup Internet Banks and Transfer
You're doing it all wrong if you've only one bank account for receiving a paycheck and issuing payments. Instead, you should utilize online banks for emergency funds, sinking funds, and other budgeting.
Internet banks work similarly to brick and mortar banks but without physical locations. They are safe and most, if not all, are Federal Deposit Insurance Corp. (FDIC) insured. They have better interest rates than traditional banks, and best of all, most don't have minimum deposit requirements. You can open an account with zero dollars.
Setting up an internet bank and automatic transfer will help build your funds on autopilot. You can distribute paychecks among your bank accounts after covering basic needs.
Watching these bank accounts grow in just a couple of years is incredible.
Setup Maximum Spending Alerts
One nifty little feature to activate on a credit card to control expenses is setting up a balance alert once it hits your set ceiling. It's like placing your own personal credit limit.
It's easy to get out of control when you don't track spending. Rather than getting overwhelmed by the expenses when you hit the payment deadline, an instant push notification on the balance alert can help control spending immediately.
Maximize Saving Through Tax-advantage Accounts
Tax-advantage accounts can receive money through paycheck deduction. You just have to set one up. Funds can automatically be moved into retirement plans like IRA, 401(k), or 457b or health plans like Health Savings Account and Flexible Savings Account. They can also be 529 (college savings plan) and Dependent care FSA.
You can reduce taxable income and save money for the future through tax-advantaged accounts. Some companies even offer employer matches. The paycheck deductions to these accounts are automatic, and there is limited to no access to these accounts, which promotes forced saving.
Teamwork Makes Dream Work
Money goals are easier to accomplish if tackled as a team. Spouses must work together towards a common financial goal.
Adam Kol, J.D., LL.M., Owner and CEO of The Couples Financial Coach, says – “Couples should use values-based budgeting: each person rates expenses from essential down to waste, and then, as a team, should shift spending more towards what enjoyment.”
The Bottom Line
Living paycheck to paycheck is not wrong as long as you set up retirement accounts, sinking funds, and emergency funds. If your earnings are tight, try to bring more income through a side hustle, a raise at your current job, or apply to a different company. Look into your spending report. Most of the time, solving an expense problem frees up cash so you can start managing your money effectively and live a prosperous life.
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Featured Image Courtesy of Pexels.
Ram is an Engineer by day and a personal finance blogger by night. He shares his tips and tricks on earning, saving, and growing money through his blog, Dollar for Cent. He uses his analytical and problem-solving skills to tackle money problems, find deals, and increase wealth. He loves his day job but believes our lives should not be location-bound and time-constrained. He documents his financial journey and hopes to reach financial freedom.