Living paycheck to paycheck will kill you slowly.
I’m not kidding. According to the American Psychological Association, financial worries are the largest cause of chronic stress for Americans. Chronic stress increases your cortisol levels – also known as the “stress hormone”.
Why does that matter?
Living paycheck to paycheck can be stressful and therefore slowly causes your mental and physical health to deteriorate.
It only makes sense that one of the first tasks to tackle when getting your finances in order, is to break out of the paycheck to paycheck cycle.
First, lets explore the bad money habits that causes this lifestyle.
Why You’re Stuck in the Vicious Paycheck to Paycheck Cycle
The root cause of (nearly) all money problems is that people don’t save enough (or any) of their earnings. The stressful paycheck to paycheck lifestyle is a symptom of this problem.
You’re probably thinking:
“Uh duh! If I could save enough of my paycheck, I wouldn’t have to live paycheck to paycheck.”
So let’s talk about the bad money habits that so many of us are guilty of which keep us from being able to save enough money:
- Spending more than you can afford
- Your bills are too high
- Not working towards building an emergency fund
- No clear savings goal
- Your income can’t sustain your lifestyle
- You’re debt is eating away at your income
Enough with the problems, lets find the solution. Ready to stop living paycheck to paycheck?
How to Stop Living Paycheck to Paycheck: A 5-Step Program
If you’ve only ever known living paycheck to paycheck then getting out of the cycle is going to take doing something you’ve never done before.
You stop living paycheck to paycheck when you have a decent sized emergency fund built up and enough in your bank account to not have to worry about having enough money for rent or groceries.
Here’s a 5-step program to stop living paycheck to paycheck:
1. Track your expenses
The first step is to track your expenses.
Lots of people recommend that you start by creating a budget, but in my experience, people who are new to budgeting tend to underestimate how much money they spend in each category.
That’s why it’s important to know where you’re money is disappearing to before creating a budget.
To do this, you can go through your bank account or credit card account and sort every transaction into categories.
The categories you sort the transactions into are up to you to decide. Here’s what mine looked like:
- Insurance (car/health)
- Home bills (gas/electricity/water/internet)
- Subscriptions (Netflix, Hulu, etc)
- Eating out
- Health (Gym, haircuts, etc)
Going through your bank account and recording each transaction will take most people a long time.
Here’s a pro-tip: Sign up for a free Personal Capital account. You can hook up your bank or credit card account and it will automatically sort your transactions into categories! It’ll even tell you how much you spent every month on each store. Personal Capital is free to use and is my favorite personal finance tool (here’s my in-depth review). Currently they’ll give you $20 just to sign-up for a free account…
Once you have all your transactions sorted, you’ll start seeing your patterns of spending.
When I first started tracking my expenses, I noticed right away that I spent way too much money on groceries every month. I was spending over $1000 for one person!
Day to day, I never noticed how much I was spending on groceries because my bill was always under a $100. I just never realized how often I went grocery shopping.
- Trying to save money on groceries? Check out my review of Ibotta
Hopefully, you’ll also notice that you’re spending too much money on certain categories.
Now it’s time to take this information and create a realistic budget.
2. Create a budget
The next step is to create a budget.
Having a set budget for each spending category is the best way to make sure you’ll have money left over to put towards your emergency fund and bank account. Having extra money in your bank account and emergency fund is the only way to stop living paycheck to paycheck.
There are many different schools of thought when it comes to how to budget:
Zero-Based Budgeting: Zero-based budgeting is a way of budgeting where your income minus your expenses equals zero. You have to make sure your expenses match what’s coming in during the month and every dollar gets a function.
50/20/30 Budgeting: The 50-20-30 Rule helps you build a budget by using three spending categories: 50% of your income should go to living expenses and essentials. This includes your rent, utilities, and things like groceries and transportation for work. 20% of your income should go to financial goals, meaning your savings, investments, and debt-reduction payments (if you have debt, such as credit card payments). 30% of your income should be used for flexible spending. This is everything you buy that you want but don’t necessarily need (like money spent on movies and travel).
Envelope Budgeting: With the envelope system you use cash for different categories of your budget, and you keep that cash tucked away in envelopes. You can see exactly how much money you have left in a budget category just by looking in your envelopes.
There are plenty of other ways to budget. Which one you choose is up to you. The important thing is to choose a budget that you will stick to.
3. Build an emergency fund
With the extra money you save every month from your budget, you need to build an emergency fund.
I already wrote a guide on what an emergency fund is, how much you need to save, and where to keep it.
The important part is that you actually take the time to build one.
4. Automate your savings
After a month or two of following your budget and making any adjustments, you should start automating your finances.
The first thing you can do is to automatically put a portion of your paycheck into your emergency fund and savings account. If you’re paid via direct deposit than this is easy. Most employers have no problem funneling part of your paycheck into a different account.
You just have to ask.
5. Earn more money
Once you have a budget and have automated your finances, the next step is to increase your income.
By increasing your income, you can increase the amount you put towards your savings AND the amount of money you can spend on a monthly basis to increase your standard of living.
There are many ways to make extra money. You can get a second job or start a side-hustle.
Here’s an article I wrote about how to make extra money that outlines several different methods you can try.
Tools to Help You Stop Living Paycheck to Paycheck
Personal finance tools and apps can make escaping the paycheck to paycheck lifestyle easier.
Here are a few different tools that I would recommend trying out:
- Personal Capital: I mentioned Personal Capital earlier in the article as a great way to see where your money is going. It’s also a great net worth tracker. You can read my full review of Personal Capital here or sign up for a free Personal Capital account and get $20 for free here.
- Trim: If you’re like me and have lots of subscriptions (Netflix, Hulu, Amazon Prime, etc), then you may want to try out Trim. It’s a great way to save money. It automatically cancel subscriptions you no longer want , negotiates your Comcast bill, finds you better car insurance, and much more.
- Ibotta: This is my favorite way to save money on my grocery trips. Ibotta is a cash-back app that lets you upload your receipts to earn money for certain items. It’s free and easy to use. You can read my full review of Ibotta here or sign-up for a free account and $10 sign-up bonus here.
- Paid survey sites: If you’re sitting on the couch watching Netflix, why not earn some extra money at the same time? I wrote about the three best survey sites of 2018 here. If you just want to get started, those sites are: Swagbucks, SurveyJunkie, and Vindale Research.