Expert Advice for Breaking Out of the Paycheck-to-Paycheck Cycle
The Great Recession might be over but make no mistake about it: Americans are still in financial turmoil. According to a recent study released by GoBankingRates, 49 percent of Americans live paycheck-to-paycheck. This means nearly half of the country is barely scraping by with their income —struggling to cover monthly expenses, let alone contribute to a savings fund.
You don’t have to accept this financially precarious state as inevitable. There are ways to proactively escape the paycheck-to-paycheck cycle. We called on three financial experts — Lauren Lyon Coles, Your Money Editor at Business Insider; savings expert Jeanette Pavini of Coupons.com, and Professor of Financial Management, Victor Ricciardi — for advice on how to break out of this challenging financial rut, and here is what they had to share.
Create (And Stick To) a Budget
Unsurprisingly, Ricciardi says the first, and easily most important, step in breaking out of the paycheck-to-paycheck cycle is to create a monthly budget. What are your monthly expenses and payments? “We have a tendency to overestimate the value of our income and underestimate our expenses each month,” he explains. “A budget allows you to see your monthly expenses clearly and anticipate payments ahead of time so you don’t feel as helpless when the due date arrives.” Coles adds: “Implementing a budget—even a loose one—helps set boundaries on your spending…and creates a momentum that keeps you focused on your finances throughout the month.”
Determine Wants Versus Needs
According to these experts, the next step in escaping the paycheck-to-paycheck rut is distinguishing your wants (i.e. new clothes, cable, takeout, etc.) versus your actual needs (i.e. rent, bills, and grocery money). “Our wants are what typically result in our overspending,” Ricciardi explains, “which makes it even harder to save money from each paycheck for future expenses.” That’s why prioritizing personal necessities over desires won’t just help you stick to a monthly budget, it helps you to see exactly where your paycheck goes and, more importantly, what you don’t really need.
Start Saving STAT
Once you get your budget and list of necessities in place, it’s time to really break out of your paycheck-to-paycheck lifestyle by saving some money every month. Ricciardi suggests setting 5 to 10 percent of every paycheck aside (as soon as you cash it) to start a savings account for emergencies. Pavini recommends a similar plan of attack, by setting up an automatic withdrawal from every paycheck directly into a savings account. “Even if it’s only $10 or $20 a paycheck,” she says, “you will be able to build your savings into a couple hundred dollars by the end of the year.”
If your place of employment offers any type of retirement plan or 401K, Ricciardi suggests committing 5 to 10 percent of your gross salary each month to increase your future savings. “Not only will this help you save money on taxes,” he says, “in many cases your company will match part of your monthly contribution and help you bulk up your retirement fund.”
When looking for ways to save money on an already lacking paycheck, these experts believe it pays to use your imagination. “If you notice you’re spending way too much on fancy salads or happy hours, you don’t have to switch to ramen and water.” Coles says, “Just buy your favorite salad ingredients at the grocery store every week, and create your own fancy salads at home to bring to work.” Similarly, Pavini suggests getting creative about finding ways to cut down the cost of your needs and bills. “Call your phone or internet provider and make sure you aren’t paying for services you don’t use,” she says. “Or simply build your weekly menu around what’s on sale at your grocery store.”
Don’t Deprive Yourself
Last but certainly not least, remember that although saving money is integral to breaking out of the paycheck-to-paycheck loop, it’s still important to reward yourself for your hard work from time to time. “The behaviors associated with overeating have the same characteristics as overspending.” Ricciardi says, “You can put yourself on a spending diet to avoid unnecessary purchases, but depriving yourself too much can lead to impulsive spending.” Instead, Coles suggests treating yourself to an affordable luxury every week to give you something to look forward to and more importantly, avoid future overspending. “Pick up a cheap bottle of wine or some delicious cheese at Trader Joe’s and have your friends over instead of going out to a pricey bar or restaurant.” She says, “These little spending hacks allow you to save money without sacrificing the things that bring you joy.”
A Note on Credit Cards
As enticing as using credit cards can be when you’re struggling financially, Ricciardi reminds us that living off of credit isn’t always the best route. “Often credit cards result in overspending because these plastic cards do not feel like real money,” he explains. “Also, we have a tendency to overspend with credit cards because many of us only check our statements once per month.” So what does Ricciardi suggest if you must resort to charging? “My advice is to pay off the entire balance each month and avoid paying very high interest rates. In addition, monitor your credit card activity on a weekly basis to avoid overspending. Credit cards are important to have for emergencies and are helpful in building a strong credit score (credit history) as long as these cards are used wisely.”