Earning a good income doesn’t mean you’re able to save. In fact, millions of people don’t have enough in their bank accounts to cover a $1,000 emergency should something go wrong. Others have scant retirement savings or their net worth is in the red due to debt. It doesn’t matter how much you make if you spend every available dollar that you bring home. To break out of the paycheck-to-paycheck cycle, you must look at your situation, take steps to change your habits and prioritize saving over spending.
Here are five steps you can take to help break the cycle and start building your savings right now.
1. Address Why You Are Living Paycheck to Paycheck
There are countless reasons why you might be stuck living paycheck to paycheck, but here are some of the most common:
- Overspending on things you don’t need
- Mindless spending – you don’t know how much you spend or on what
- Your expenses are higher than your income
If the last reason describes your situation, it’s time to work on earning more money. You can only cut your budget so much, but your earning potential is infinite. You could:
- Search for a different position
- Take on more responsibility at your current job and earn a raise
- Take a part-time job
- Monetize a hobby
- Start freelancing or consulting on the side
If your problem is mindless spending—you overspend or just don’t pay attention to your cash flow—it’s time to change your habits.
You can stop living paycheck to paycheck, but it will take commitment to putting savings over spending. That might be a little easier to do if you take the time to understand what you actually value.
2. Focus on Your Priorities and Adding Value
Think saving money means you need to stop spending and deprive yourself? Not exactly. It’s more about spending your money in a way that adds value to your life and cutting out the costs that don’t. (For related reading, see: Ways Money Can Buy a Little Happiness.)
To do this, you need to understand your values. What’s important to you? What do you find meaningful?
Now, look at your spending. Do nights out on the town every weekend align with what you value? If you value friendship and community, maybe, but you need to consider other lower-cost ways to spend time with your friends.
Honestly evaluate each transaction you made in the last few months: Did they add value to your life? How? Was there a less expensive alternative? Do you regret any transactions?
3. Revise Your Budget
Now that you know what you actually value and took the time to cut out the expenses that didn’t align with what you find important or meaningful, update your budget to reflect the changes. When you do, make sure to include your savings or investment goals as a line item and fund those goals first each month. If you still can’t make room for savings, put more costs on the chopping block.
Again, you don’t want to deprive yourself. The point is to create a budget that reflects your values. You should feel free to use your money in a way that makes you happy. That happens most often when we spend on experiences or services that provide us with more time in our day, like hiring someone to do chores or errands you hate.
Focus on cutting costs that revolve around what you buy to impress other people, not to enjoy for yourself, and other material goods. These purchases simply don’t provide lasting happiness, and there are more important things to make room for in our budgets. (For more from this author, see: How to Create a Budget You Can Actually Stick With.)
4. Track Your Spending
Once you understand the root of the problem, it’s time to move forward with a sound spending plan. You’ll want to set up not only a budget, but something that allows you to track your spending, too. After all, a budget doesn’t do you much good if you still don’t know what you spend on or if you’re overspending in certain categories.
5. Crush Lifestyle Creep
To stop living paycheck to paycheck, you must spend less than you earn. This is why the paycheck to paycheck problem is one that applies to countless people, regardless of income.
You can make an incredibly good living earning hundreds of thousands of dollars, but the problem isn’t how much you make, it’s how much you spend. Too often, we increase our spending anytime we get the opportunity: when we get a raise, a new job, a big client for our business, etc.
When this happens, you suffer from lifestyle creep. It’s when you always spend as much as you can and just break even every month. Your lifestyle keeps getting upgraded, but your savings? Well, you’re consistently behind on your goals.
Stop lifestyle creep before it happens. It’s always easier to keep your spending stable than it is to let it spike then cut out luxuries you’re used to enjoying.
Whenever you get a raise or start earning more money, consider investing 50% of it. Or increase your existing contributions to your employer-sponsored retirement plan or an IRA. Create an automatic contribution so that you never see that “extra” money, and aren’t tempted to spend it.
Avoid the temptation to add in more expenses every time you earn more money, and you’ll break the paycheck to paycheck cycle you feel stuck in now.
(For more from this author, see: Five Easy Ways to Improve Your Credit Score.)
Registered Representative/Securities and Investment Advisory Services offered through Signator Investors, Inc. Member FINRA, SIPC, and Registered Investment Advisor. AspenCross Wealth Management is independent of Signator. 1400 Computer Drive Westborough, MA 01581