Goals for the New Year: How to Stop Living Paycheck to Paycheck

Living paycheck to paycheck can cause stress and increase your chances of taking on credit card debt. There is a way to break the cycle and improve your financial situation.

We’ll explain how to stop living paycheck to paycheck and why the new year can be a great time for a financial reset. By the end of this article, you should be able to put a few tangible things in place to help you go from just making ends meet to reaching your financial goals. 

What does it mean to live paycheck to paycheck?

Living paycheck to paycheck means all or almost all of your income pays expenses — with nothing or very little remaining after each paycheck. That leaves you waiting for that next paycheck to come in so you have more money to spend. As of April 2022, 61% of Americans are in this situation.

Living paycheck to paycheck can make it difficult to hit your savings goals or put money away for retirement. It can also impact your goals down the road. 

For instance, if you are living paycheck to paycheck and do not have an emergency fund in place, you may be forced to put a large expense on a credit card. If you can’t pay off the balance on your credit card, this may lead to more debt thanks to interest charges and might harm your credit score. 

This, in turn, could make you less appealing to lenders in the future. You may find it more challenging to secure financing like a mortgage, auto loan or personal loan in the future. And, if you do secure lending, it may come with stipulations or higher interest rates.

Fortunately, it’s never too late to start financial planning and putting measures in place so that you can stop living paycheck to paycheck. The new year is a great time to start.

Why the new year is a good time to implement a financial goal

New Year’s is an opportune time to set a new financial goal because it can serve as a bit of a reset. Setting a goal at this time allows you to reflect on the previous year and identify areas where you’d like to change. Plus, the fresh start of a new year may provide you with a renewed sense of purpose and motivation.

It’s important to set goals and not resolutions. Goals are much more measurable, ensuring that you hold yourself accountable. For instance, one financial goal that you can set for yourself is to put $10 into an emergency fund each week. Perhaps this means having to cut back on a subscription, like a streaming service. Going into the new year with defined, well-intentioned goals is a great first step in learning how to stop living paycheck to paycheck.

How to stop living paycheck to paycheck in 6 steps

Now that you have a better idea of why you should consider setting goals to stop living paycheck to paycheck this year, let’s take a closer look at the steps to achieve it.

1. Setting up a budget

Budgeting is essential if you want to learn how to stop living paycheck to paycheck. Setting up a budget allows you to track money in vs. money out, comparing your income to your expenses.

One option is to start with the 50/30/20 budget rule, which calls for:

• 50% of your net income going toward fixed expenses, such as your mortgage and rent payments, child care, car payments and groceries 

• 30% of your net income going toward discretionary spending, including non-essential expenses like entertainment, gym memberships and streaming services

• 20% of your net income going toward savings and debt repayment

A budget is a good way to make a plan for your money before spending it, but it can also help you get clear on where your money has been going. This can give you an idea of where you might be able to lower your monthly expenses so you can free up some of your income. 

2. Lowering your monthly expenses 

When learning to stop living paycheck to paycheck, evaluate your monthly expenses. While many costs are fixed and necessary, others are not, such as those in your discretionary spending category. 

Seventy percent of American millennials live paycheck to paycheck and subsequently don’t have financial freedom. However, some millennials also report having a "treat yourself" mentality, indicating that they treat themselves to a purchase that brings them joy at least once a month. While there’s room for enjoyment in life, weigh those purchases against financial responsibility. Is treating yourself worth the stress of living paycheck to paycheck? 

In the end, it comes down to compromise. Perhaps you brew coffee at home and only buy from a coffee shop once a week instead of every workday. Similarly, consider lunches at home instead of ordering delivery. Cutting back on discretionary spending can help ease financial burdens. 

Addressing your discretionary spending is the easiest way to lower your monthly expenses. If you have fixed expenses, like insurance or loan payments, you may not have as much ability to reduce them. However, that’s not to say it’s impossible. 

For instance, you can consider a mortgage refinance to lower your interest rate and, therefore, your monthly payment. Or you might be able to get a new phone plan or internet service provider. You may even take steps to lower your utility bill.

3. Paying off debt

Breaking the cycle of debt can be challenging.

More than 80% of adults in the U.S. have a credit card account, and there is more than $887 billion in outstanding credit card debt. This does not account for debt associated with mortgages, auto loans, student loans and other lending. 

Your debt payments can eat into your budget, making it hard to pay for expenses or save. By paying down debt, you’ll lower how much you owe each month and cut down on interest charges. This, in turn, will free up money in your budget. 

There are different methods and tools you can use to help you pay off debt. One way is to use the debt avalanche method, which has you focus on paying down the debts with the highest interest rates. You could also consider the debt snowball method, where you focus on paying down your lowest balances first to help gain a bit of momentum. or debt snowball strategies. 

You could also use a tool like Tally† to help you pay down high-interest credit card debt.

4. Anticipating emergencies

If you live paycheck to paycheck, an unexpected expense is likely to stretch you thin. You can avoid this by establishing a rainy day or emergency fund. These are essentially cash reserves that should sit in a savings account, available only when a specific event happens, including: 

• The loss of a job 

• A medical incident or hospital bills 

• Significant car repairs 

Because you have extra money sitting in a savings account, you don’t need to take on debt to cover the expense. 

5. Saving for future goals and retirement 

Once you've paid off your high-interest debt and tucked some money away for emergencies, you can begin saving for future goals and retirement. This can be a:

• Fun goal like a vacation

• Mid-term goal like a down payment for a house

• Long-term goal like retirement

To help you reach your goals, consider setting up automatic deposits into your savings account. This way, the money doesn’t enter your checking account, and you’re not tempted to spend it. If you set up automatic deposits and stick to only spending the money in your checking account, you'll find that your savings account will grow faster. This, in turn, provides you comfort and flexibility so that you can stop living paycheck to paycheck.

Additionally, if you are saving for retirement, your employer may be able to automatically fund your 401(k) directly from your paycheck. It’s also possible that your employer offers a 401(k) match, which is essentially free money. 

6. Earning more 

This final step can happen at any point in the process, but another way to stop living paycheck to paycheck is by earning more money. Though there are numerous opportunities available, a few ways that you can increase income include: 

• Asking for a raise 

• Starting a part-time job 

• Working a side hustle 

Even working a few hours per week on the side can help ease the financial burden of living paycheck to paycheck and improve your personal finances. You can use these extra funds to pay down credit card debt, student loans and car loans. If you have no savings, increasing your income could provide you with the means to get started. 

A part-time job doesn't need to be a part of the permanent solution, but it can help provide a bit of breathing room as you work to turn your financial situation around. 

Learn how to stop living paycheck to paycheck and reach financial freedom

If you're one of the many Americans living paycheck to paycheck, you may be wondering what you can do to escape the cycle. Not having enough money in your bank account and waiting until payday to cover your expenses can be stressful. Fortunately, learning how to stop living paycheck to paycheck is achievable. 

If you can implement just some of the six tips provided, you could be in a much better situation. The most important step is getting started, and the new year is a great time to do so. Changing your spending habits can be daunting, but remember, just a few dollars here and there can add up over time. 

However, you don’t have to stop the paycheck-to-paycheck cycle alone. If you’re looking to pay down debt, consider Tally. Tally is a credit card payoff app that automatically pays down your high-interest credit card debt efficiently with a lower-interest line of credit.

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.