How to Escape Living Paycheck to Paycheck

Nearly 80% of Americans say they are living paycheck to paycheck, according to a 2017 report by CareerBuilder. Living paycheck to paycheck feels like running in a hamster wheel – all of the money you earn goes out, and you’re back at square one with nothing to show for it.

Breaking out of this cycle is as simple as cutting your costs and increasing your income. We’ll explain how to achieve this, and how to put that new cash into savings.

Track Your Expenses

Your first step is to learn where your money is going. Many budgets are a death of a thousand paper cuts, where little expenses here and there add up to cause a huge gap.

Track your expenses using a notepad or free software such as Mint. Once you track where your money is going, you’ll learn where cuts could be made.

Cut Your Expenses

Once you know how your money is being spent, you’ll know what to cut back.

Divide your expenses between fixed and variable. Fixed costs are consistent every month, such as rent or car payments. Variable expenses are anything that could fluctuate each month, such as groceries or eating out.

Axe the Big Expenses

Although many talking heads claim that millennials are wasting their money going out for coffee or avocado toast, the truth is that these won’t make a dent until you address your top costs.

Axe your major costs to make a dent in your expenses.

• Housing – keep yourself from being house poor and make sure you don’t spend more than 30% of your take home pay on housing.
• Car – follow the 1/10th rule by owning a car that is no more than 10% of your annual salary. Your monthly payments and maintenance costs will nosedive once you follow this.
• Groceries – you can save money by switching from name brands to generics, as well as by using cash back apps.

Trim the Small Costs

Scrutinize your variable expenses. Is there anything you could cut back, like shopping or dining?

While each variable cost is small, they add up over time. There are a lot of ways to cut costs without looking cheap, here are some quick and easy tips:

• Cancel your gym membership
• Replace your cable with streaming services
• Negotiate for a lower cell phone plan
• Shop your insurance for lower rates
• Bring your lunch to work instead of going out
• Drink coffee at work and home instead of going to a coffeeshop
• Order drinks instead of shots when you’re out at bars

Get a Raise

Making more money is a lot more fun than cutting expenses. A quick raise can get you out of living paycheck to paycheck, as long as you don’t succumb to lifestyle inflation.

Learn how to negotiate for a raise, and take that pay bump to the bank. The beauty of compound interest will turn those incremental raises into a fortune at retirement.

You can also get a raise by doing work on the side. Think about what makes you valuable at work, and turn that into a new job.

Are you knowledgeable about a certain industry or topic? Try consulting or tutoring. Do people constantly come to you for help on something? Create a blog and see if the rest of the world will find value in your knowledge.

Side businesses will increase your income and diversify your income streams. Don’t worry if it fails, just try something else.

Boost Your Savings

You’ll have a lot more cash in the bank once you cut your costs and increase your income. Max out your hierarchy of savings with that cash before spending the money on other stuff.

This savings will significantly increase your net worth, and you’ll find that more and more of your income will come from this savings in dividends, interest, or rental income.

The Millionaire Next Door has a net worth equation to keep you honest. As great as it is to get off living paycheck to paycheck, the long game is to have a large enough nest egg for retirement. The Millionaire Next Door’s formula is a great sanity check to see how you’re doing.

Target Net Worth = Age x Annual Pre-Tax Income / 10

Living Paycheck to Paycheck – The Bottom Line

Living paycheck to paycheck is a vicious cycle, but it’s a cycle you can break.

Track expenses to see where your money is going, and axe major expenses like your housing, car, and groceries.

While you cut your costs, negotiate a raise and do work on the side to make more money. Put this new cash in savings before you have a chance to spend it.

As you save all of this extra money, you’ll create a powerful flywheel of more income coming from savings instead of your salary. Keep building your savings, and you’ll have a solid nest egg ready for you at retirement.

Anybody can retire early, and the first trick is to escape living paycheck to paycheck.