5 Steps to Stop Living Paycheck to Paycheck
10 MIN READ
Published August 29, 2023 | Updated September 07, 2023
58% of all Americans are living paycheck to paycheck. Even more Americans say they’re feeling stressed about their finances. Things like high cost of living, spending habits, and debt can impact your ability to live comfortably. Learn how to stop living paycheck to paycheck to improve your financial situation and free up funds to save for the future.
5 Steps to Stop Living Paycheck to Paycheck
If you want to learn how to stop living paycheck to paycheck, you’ll need to take a deeper look at your finances, make a few sacrifices, and find ways to manage your money more efficiently.
1. Assess Your Finances
The first step of the process is to take some time to assess where you stand right now. This means you’ll need to review your income, expenses, and debts and see if you need to make changes anywhere.
Create a Budget
You need to create a budget to break out of this cycle. Without a budget, you won’t be able to spot opportunities to save money or realize that you need to make more money. Budgeting is a crucial money management skill that everyone needs to learn. Add up all your income and monthly expenses. If you don’t earn a fixed income each payday, add up how much money you made in the last year and then divide it by 12.
After accounting for all your expenses, check how much you have in your checking account at the end of the month. If you don’t have enough money to save or pay off debts, you’ll need to find ways to either reduce your expenses or increase your income.
A great way to stop living paycheck to paycheck is by cutting back on discretionary purchases. Look at your bank account and credit card statements for the last month to see how much you’re spending on nonessential purchases each week. Think about what things you can go without, such as restaurants, clothing, subscriptions, streaming services, and entertainment.
You don’t need to cut out everything, but a few sacrifices here and there can add up over time. This will allow you to start putting aside some money for savings that can provide you some breathing room.
If your income and expenses don’t add up, your lifestyle may be unsustainable for the amount you earn. Ask for a raise at work, use your skills to start a side hustle, or sign up for a part-time job for some extra cash.
Either of these options will help you earn a little extra money that you can use to pay off your credit card debt, build an emergency fund, or save for future expenses.
2. Build an Emergency Fund
Unexpected bills and emergencies make it difficult to get out of debt and stop living paycheck to paycheck. Personal finance experts recommend having three to six months’ worth of living expenses put aside as an emergency fund to you’ll have cash on hand to deal with surprise bills, medical events, and car repairs.
Start by putting aside a little money each month. It doesn’t have to be much. $ 25-$50 is enough to start with. You’ll be motivated to save more once you see your savings adding up. Having this extra money on hand will ensure you don’t have to turn to high-interest debt to deal with financial bumps in the road.
Consider High-Yield Savings Accounts
A high-yield savings account is an essential tool as you begin to build up your emergency fund. This type of savings account will give you a higher interest rate on your balance while ensuring you’ll have quick access to the funds in case of an emergency.
Several banks are currently paying 5.50% APY on their high-yield savings accounts. Open a savings account and make an initial deposit. Make it a habit to transfer a little each week to start building your emergency fund.
3. Pay Off Debt
One of the best ways to get out of the paycheck-to-paycheck cycle is by paying off your debt. If you’ve accumulated thousands in student loan debt, car loan, credit card debt, and other consumer debt, it may make it difficult to get out of it. But there’s a way out. Use a budget to see how much you can pay each month toward repayment. Even a little extra on top of the minimum payment can make a difference.
Prioritize High-Interest Debt
When paying off your debt, prioritize paying off high-interest debts, such as credit cards. Credit card balances, when left unchecked, can quickly grow, so it’s best to pay them off as early as possible.
There are several strategies you can use to pay off credit card debt. For example, the debt snowball method involves focusing on paying off the card with the smallest balance first. Once you pay it off, you can move on to the card with the second-lowest balance. With the debt avalanche method, you start by paying off the card with the highest interest rate first before moving on to the next most expensive card.
If you have multiple debts, consider debt consolidation to roll all your debts into a new loan at a lower interest rate. This will help you save a considerable amount of money in interest charges and simplify payments since you’ll only have one monthly payment each month instead of multiple.
If you primarily have credit cards, balance transfer credit cards are also a good choice. You can transfer balances from multiple credit cards into a new card, ideally at a lower interest rate. Many credit card issuers offer 0% APR for a limited time. If you manage to clear your balance before the offer expires, you can avoid paying interest on the balance.
4. Invest Wisely
One of the most important strategies to stop living paycheck to paycheck is to start saving and investing your money wisely. For many, there often isn’t much money left to invest at the end of the month after making ends meet. If you use the tips listed above, you’ll be able to find ways to reduce your expenses and increase your income so you can start building a nest egg for your retirement.
Start with Retirement Accounts
Start by focusing on your retirement accounts and determining if it's best for you to pay off debt or save for retirement.
The 401k is a retirement savings plan sponsored by your employer. This will allow you to put away some portion of your paycheck each month into the account. If your employer offers matching, invest there first. You’ll have free money to invest, so you should always take advantage of it before you fund outside investments. It's almost always advisable not to tap into these funds early, but if you need to, make sure you understand how to use your 401K to pay off debt or other expenses.
Depending on the type of retirement plan you have, your 401k will also offer you tax savings. Traditional [401k plans](https://www.irs.gov/retirement-plans/401k-plans#:~:text=A%20401(k)%20is%20a,can%20contribute%20to%20employees'%20accounts. target="_blank" rel="nofollow"), for example, are funded with pre-tax dollars, so it lowers your tax liability. If you have a Roth 401k plan, your withdrawals at retirement will be tax-free.
Consider Low-Cost Index Funds
If you have money left over after putting aside money for your retirement account, consider investing in low-cost index funds. Index funds are ETFs with the aim of matching the performance of a designated index.
When you invest in an index fund, you get easy access to a diversified selection of securities. With exposure to thousands of securities, there is less overall risk involved. Index funds have consistently beaten other funds when it comes to total return. Another benefit is that the management fees are much lower.
5. Stick to a Plan
One of the most crucial steps to stop living paycheck to paycheck is consistency. Once you have made a plan to pay off your debt, cut expenses, build an emergency fund, and start investing, stick to the plan. Only then you’ll be able to achieve your long-term goals.
Monitor and track your progress regularly to ensure you’re on track to achieving your goals. For example, if your goal is to reduce your expenses, it’s important to take a look at your bank account statement at the end of each month to see if you were able to achieve this goal.
Tracking and monitoring will allow you to catch any wayward financial habits early on so you can get things back in control before the situation gets any worse.
Seek Professional Help
If money management and budgeting seem challenging, consider credit counseling or work with a financial advisor. A professional can help you identify your goals, create a good budget, and create a plan to achieve important goals for a better financial future.
While you can do all of the steps listed above on your own, sometimes it’s best to seek help from a professional for financial planning so you can change deep-seated financial beliefs and habits that may be holding you back.
Wrapping Up - It’s Possible to Stop Living Paycheck to Paycheck
When you’re living paycheck to paycheck, it may seem like a never-ending cycle. Getting out of debt and building your savings take time and effort, but it’s possible. There may be a few areas that you can cut back on to free up some money. You may find it takes longer than planned to achieve your financial goals, but even if you make small contributions each month, your savings will build up over time.
One of the most important things you can do to stop living paycheck to paycheck is to pay off your debt. If you have a lot of high-interest unsecured debt, get in touch with TurboDebt. Our team will offer you a personalized debt relief option based on your individual needs. Get in touch with us for a free consultation today.