Living paycheck to paycheck means you are seated at the edge of your seat on the 5th day of every month and hoping the salary comes in before your landlord knocks on your door. It means all your money usually comes in and goes right back out again by the end of the month, sometimes, way before the month ends.
That might not seem so bad at first, because in your eyes, you're staying on top of bills after all, right? But if that's all you're doing, there's no way to look to the future—because you can't afford to save any money yet. And there's no absolute security with your money today. One little "life happens" moment can bring it all crashing down.
Let us take a closer look at some tips to practice to stop living from paycheck to paycheck.
15 Ways to Stop Living Paycheck to Paycheck
A budget will clearly show what amount is coming in and where it is going. If you want to start saving, and you should, as life and occurrences of emergencies are unpredictable, make a budget that you can stick to and can help you spot any money unaccounted for.
Budgeting helps you see spending habits you didn't even know you had. Therefore, you can make the required changes so you can reach your goals.
Step one is to get a clear picture of what you spend. Have it compared to what you earn. Take, perhaps, a 2- to 4-week period to track the cash you spend. There are basically two ways to handle your money to ensure you get out of debt: to make more or to spend less than you earn. These should be the primary goals of a person living from paycheck to paycheck.
Are you a saver or spender? This article talks about the psychological differences between savers and spenders and offers tips on how both can improve their financial position.
A good thing about tracking your expenses is you would be able to see whether an expense qualifies as a want or a need. One place you can do this is on your shopping list, if it includes snacks, "junk" food and other non-essential products. You do not need to dine out for supper. Instead, you could make your own food at home. It is way cheaper.
When budgeting, the essentials (food, shelter, utilities, transport) should come first. After paying for these, make a list of everything else you need to pay for, in order of importance. Once your money runs out, you stop spending.
In our Money Psychology series, we earlier explored some unusual money habits that Kenyans deal with - they can significantly affect our ability to spend rationally. The good thing is that ditching them pays huge dividends. Learn more here.
As the name suggests, an emergency fund will help you cater to unprecedented financial occurrences such as an accident, job loss or a sickness. Instead of catering for these from your paycheck, it saves you a load of cash. Read our in-depth guide on creating an emergency fund here.
Once you have come up with ways to cut down your spending or increase your income and have something left, you want to start saving towards your financial goals.
The best way to come out of the paycheck to paycheck cycle is to create a financial cushion - a fund that can help you achieve one of the primary goals we discussed above - either earning more or spending less.
The savings account can be aimed at starting a small business on the side, getting a much-needed professional qualification to increase your earnings or also as a good incentive to keep spending less as you know where the savings are going.
In this account, you can put in the amount that has not been spent or money that has been freed after downsizing your spending.
Letting your money stay in your current account can be a little risky as you can be too tempted to spend it. A good place for you to do your savings is an account that's less accessible but not too hard to access. Ideally, you could save your cash in a savings account that earns interest with time, or in a money markets account or any other means of earning interest on your money while it stays safely away.
Whenever you are trying to live within your means, or below it even, you have to consider how much money you owe and compare it to how much money comes in. This should include especially the large recurring debts, like the rent arrears, or mortgage and car loan repayments and other bills.
Try to pay up your debts as fast as possible, and restrict yourself from taking up any more debt - unless it is absolutely necessary.
Making more money means more financial freedom. If you are working a 9-5, do not fret. You can still make money purely online, without leaving the comfort of your home. For instance, academic writing, vlogging, podcasting, transcription etc.
If you have items you no longer need lying around in your house, you might put them up for sale and earn some more money. It could be an old refrigerator, a wooden table, utensils, clothes, etc.
Rather than just having more money to spend, if you are going to sell something that you have owned for a while, it would make good sense to channel the funds to a longer-term goal e.g. funding the small business you want to start, repaying debt or adding to your investment account.
When you are spending less than you are earning (living below your means), you can save. If you spend everything you've got, you can't save. And with no savings, it is nearly impossible to get ahead.
If you are looking at a big purchase, say maybe a car, a house, or even a set of sofas, you could think of saving, little by little, over a certain period of time, instead of plucking the whole amount off your paycheck.
Ideally, you want to have saved up more than just the purchase price of the item. Such that once you make that significant purchase, you still have enough left to go bye - remember your emergency fund should still remain intact and contributions to it should be factored into the roadmap to making that big purchase.
If anything is not on the budget you made earlier, do not buy it. Yes, sometimes that emotional purchase at the mall might be irresistible - it’s a good deal! But did you really plan for it? More importantly, do you need it?
Most impulse purchases are associated with either the psychological selling tactics of traders or what is called ‘retail therapy’- where buying certain items to ‘treat yourself’ may act as a form of therapy.
The truth is that you definitely should treat yourself to some nice things every once in a while - but even then, this must be also factored into your budget.
Your objective when carrying out a financial self-audit is to review how much money you made, how you spent the money, what proportion of the money you saved, what was spent that was not there (this is the debt that was acquired), and what's the progress in relation to the set financial goals, among other things.
Set some goals to drive you. The first one should definitely be to stop living from paycheck to paycheck. But, that said, it would help to get a goal that would spur you towards truly preserving that paycheck.
There are three types of financial goals; Short-term (up to 1 year), mid-term (3-5 years) and long-term (5 years or more). You should have at least one type of these goals and create a goal chart to track your progress.
Learn more about the principles of goal setting here.
Rent is, probably, the expense that consumes a greater part of anyone's salary. In fact, it is usually the greatest of all other bills. Some financial advisers still propose that you should not spend more than 30% of your income on rent or mortgage. If your housing cost is consistently more than that, you might want to think about moving to a lower cost house or to a different area.
Living from paycheck to paycheck can feel like getting stuck in a maze without a way out with your money. You're going around and around but never going anywhere.
The sooner you decide you don't want to go on in that maze anymore, and the sooner you take on all these tips, you will make movement. It might be slow. It may be hard, and some days you might feel like giving up. Don't. Focus on why you are doing it. Things may become a little tough but remember, you are tougher.