The most important financial rule to remember is that you must spend less than you earn. It’s a simple concept, but one that can be difficult to master – especially as the cost of living continues to grow faster than pay raises. This rule is even more difficult to master if you are stuck in a cycle of living paycheck to paycheck. Breaking the paycheck cycle isn’t always easy, but it’s essential if you ever want to get ahead of the game. Let’s look at a few ways you can improve your financial situation and start getting ahead of the game.
Track Your Income and Expenses
The first step is often the most eye-opening. For the next month, you need to track how much money you have coming in, and how much you have going out. You may be able to get a rough idea of your income and expenses if you go through some of your previous pay stubs to look at your income. And you may be able to track some of your expenses by looking through receipts, your checkbook register, and your credit card statements. But you will get a more accurate number if you track things as you go, especially if you have irregular income or you use a lot of cash for your purchases.
This exercise will give you a personal cash flow statement, which will help you see your income and expenses at a glance, hopefully helping you see where you can cut back to save money. It will also be a good idea to write down your regular expenses in chronological order so you know when they are due.
Balance Your Income and Expenses
Now that you have a list of your income and expenses, you have the opportunity to add them together and see how things balance out. Add up all your income in one column (paycheck, tips, bonuses, and other sources of income). Then add up all your expenses. If your income is less than or equal to your expenses, then you have some major work to do. If your income is higher than your regular expenses, then you may have too much discretionary spending (such as eating out, shopping, etc.). You can then use this information to help create a zero based budget, which is a budget that balances all income and expenses each month.
Change Your Payment Due Dates
Many companies will allow you to change your payment due date, which is helpful if you find most of your bills are due around the same time of the month. For example, most mortgage companies and landlords require mortgage payments and rent to be paid on the first of the month. Since that is the largest single expense for most people, it may be helpful to schedule your other bills later in the month. This is especially helpful if you have a regular paycheck around the 1st and 15th. Contact your credit card companies, service providers, and lenders to see if you can change the due date for your bills. This can help give you some breathing room in your budget.
Look for Areas to Cut Back
Cutting back isn’t always the most popular solution, but it can be a huge step in the right direction. Start by listing all your regular expenses and organize them by due date and the amount you usually owe, keeping in mind that some expenses such as utilities are variable. Use an average or an estimate for variable expenses. Examine those expenses and see if there are ways to reduce them.
For example, you can often negotiate a lower cable bill or you can simply drop your cable plan to free up cash flow every month. My wife and I have been without cable for over 3 years now and we don’t miss it. We have a digital antenna (one time cost of less than a month of premium cable) and we have Amazon Prime for streaming videos, which works out to around $7 per month. Blockbuster and Netflix are other attractive cable alternatives.
Other ways to cut back include reducing your cell phone plan, dropping your landline for an internet telephone service like Ooma, eating out less, changing service providers, shopping for lower insurance rates, using a programmable thermostat, and more. You may also consider trading in a vehicle with a large monthly payment for something with no payment or a smaller payment. All of these examples can free up cash flow each month.
Look for Ways to Earn More Money
I list cutting back expenses first, because it is often the easiest to do. Earning more money may or may not be easy, depending on your situation and the job market in your area. But that does not mean it’s impossible, either. Many people work part time jobs, volunteer for more hours, offer freelance services, or work other side gigs in order to earn more money. This doesn’t have to be a permanent situation, either. You could choose to do this in a part-time basis until you can get your finances in order. For example, you may have one or two debt payments that you can pay off after working a part-time gig a short time. The idea isn’t to work 80 hours a week forever. The goal is to earn more money to help you reset your financial situation. You can scale back once you get a little breathing room in your budget.
You may also be able to earn more money by having a yard sale and by selling individual items on Craigslist or Ebay. This has the added benefit of reducing household clutter while earning you more cash to help your financial situation.
The best way to meet your income and expense goals is a combination of both earning more and spending less. This will help you get out of the paycheck to paycheck cycle more quickly.
Create and Emergency Fund
It may take some time to break the paycheck to paycheck cycle, and once you do, you still need to do one more thing: create an emergency fund. Life happens, and even the best budget in the world can’t prepare us for some of the things that pop up unexpectedly. A flat tire, an illness, unexpected travel, or fill-in-the-blank. Having an emergency fund can help you avoid digging into a larger hole.
Do you have any other tops for getting out of the paycheck to paycheck cycle?