Contributing Writer at Tally
September 27, 2021
Ever feel like you’re a hamster on a wheel, moving quickly, but ultimately going nowhere?
Fifty-six percent of Americans are living paycheck to paycheck. There are varying definitions of what it means to live paycheck to paycheck, but generally, it means a person can’t pay their household expenses if they miss their next paycheck.
Living paycheck to paycheck can cause a lot of stress and increase your chances of taking on credit card debt. Fortunately, there is a way to break the cycle of living paycheck to paycheck and improve your financial situation.
Let’s cover how to stop living paycheck to paycheck. Specifically, we’ll outline tips to implement in your personal finance management.
By the end of this article, you should be able to put a few tangible things in place to help you go from making ends meet to reaching your financial goals.
If you’re going to stop living paycheck to paycheck, budgeting is essential. Setting up a budget allows you to track money in vs. money out, comparing your income to your expenses.
We recommend starting with the 50/30/20 budget rule, which calls for:
50% of your net income towards fixed expenses, such as your mortgage and rent payments, child care, car insurance and groceries
30% of your net income goes toward discretionary spending, including non-essential expenses like entertainment
20% for savings and debt repayment
Budgeting ensures that you have enough money throughout the month to cover expenses. It’s a tangible plan to help hold yourself accountable.
Unfortunately, breaking the cycle of debt can be challenging.
Suppose you took out student loans to help cover the cost of education. Coming out of school, your monthly income is low, so you open a credit card to help cover your expenses. You view this as a short-term fix and swear you'll pay off your credit card shortly after opening it.
However, because you must make minimum monthly payments on your student loans, you don't have enough money to pay off your credit card balance. You make the minimum payment, but credit card interest compounds and your balance quickly grows. To make matters worse, you don't realize that the interest rate on your credit card is 25%.
Does this sound familiar? Unfortunately, it happens all too often. 95% of adults in the U.S. have a credit card account, and there is more than $750 billion in outstanding credit card debt.
Some debt, like those for mortgages or student loans, may be unavoidable. Many times, other debts, like those associated with credit cards, are avoidable.
One fix is to stop spending on credit. Instead, only pay with cash or a debit card connected to your checking account. This prevents you from overspending, forcing you to stick to your budget.
When learning how to stop living paycheck to paycheck, you're going to have to evaluate your monthly expenses. While many costs are fixed, others are not, such as those in your discretionary spending category.
The average American millennial lives paycheck to paycheck and doesn’t have financial freedom. However, 86% of millennials have 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.
Make saving a “necessity” instead of a “luxury.” In the 50/30/20 budget, 20% of your net income should go to debt payoff and savings. If you’re asking yourself how much to save each month, consider putting at least 20% of your net income entirely into savings.
This means that the money for debt payoff is going to need to come from somewhere else. Because your expenses in the 50% category are fixed, your debt payoff funds may have to come from the 30% discretionary spending category. This could require a lifestyle change. Perhaps you only go out for dinner twice a month instead of four times. Making slight lifestyle changes can add up in the long run.
Additionally, 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.
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.
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. 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.
If you're one of the many Americans living paycheck to paycheck, you may be wondering what you can do to escape that 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. 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 cycle of living paycheck to paycheck 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. Jumpstart your debt payoff with Tally to help break the paycheck-to-paycheck cycle.
†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.