A large number of American households live from one paycheck to the next. This number has gone down since September 2016, according to a survey conducted by McKinsey & Company, where consumers expressed more confidence in their financial stability compared to the last eight years. But about 24% of the participants in McKinsey’s study still lived paycheck to paycheck. This means they struggled to cover their basic expenses and had empty checking accounts until the next pay period. With families to support and unexpected additional expenses, this can be a very difficult experience for anyone to go through.
The problem can arise for several reasons, but the main driving factor is not having enough financial knowledge. When you are financially knowledgeable, you understand the essentials of budgeting and how managing your money will help you be stable and reduce anxiety and stress.
Creating a Budget Can Help
If you are living from one paycheck to the next, the first thing you need to do is make a budget. What are your expenses? What are necessary and what are extraneous? How much do you need to have every month for your required expenses (rent, food, insurance, etc.)? When are these payments due? Cash flow also can affect payments significantly and your stress level. If you are getting paid only on the 20th but your payment is due on the 1st, you are always going to be behind. (For related reading, see: Why It's Essential to Create a Budget for Yourself.)
The first step you can take to budgeting and healthy money management is to monitor your expenses. You must know how you are spending your money, down to the dollar. It is essential that you know how you are spending your money and on what.
Begin by monitoring your spending for a couple of weeks to gauge your habits. Keep track via an online software system such as mint.com, or at the very least, a notebook. Use a method and tool you like. The most important thing is that you are aware of all your transactions.
Handling Additional Expenses
Budgeting will also help you prepare for unexpected expenses, emergencies and seasonal expenditures. You can see from your prior spending where your dollars are going. The more you prepare, the better it will be. You can also include gifts, holidays, vacations and other expenses. Budgeting early on prevents headaches later!
Next, do the math. What is essential? See where you can trim. This is easier if you have a salary. You may be getting a fixed amount every month you can work with. Look at your pay stubs to figure out your average income after tax.
After you subtract your essential expenses such as rent, food, insurance, etc., do you have any money left over? This is money that will need to go towards savings and also can be used for discretionary spending.
Lowering Personal Spending
See where you can lower your spending. Budgeting takes time. No one is a pro at it immediately. You have to adjust that budget based on your lifestyle and what you're learning about your spending habits through tracking over time.
Find ways to increase your income through an extra job, extra hours at your current job or other ways to get paid.
Finally, be realistic. If you are too drastic in your spending cuts, you will find it hard to stay motivated and may miss your target goals. Give your budget some flexibility so you can stay on track and keep going forward.
(For more from this author, see: Tracking Expenses Can Help Increase Your Savings.)