Cash News
Do you count down the days until payday — only to watch your bank account drain within hours? You’re not alone. Millions of Americans live paycheck to paycheck, trapped in a cycle of stress and zero financial wiggle room.
Here’s a closer look at how the paycheck-to-paycheck cycle starts, and how you can put an end to it.
Living paycheck to paycheck means that your income is just enough to cover your basic living expenses — such as rent or mortgage, utilities, groceries, transportation, and minimum debt payments — with little or no money left over for saving, investing, or discretionary spending.
When you only have enough money to cover your day-to-day expenses, building long-term wealth becomes more challenging. It can also lead to a great deal of mental strife when you feel like you’re barely making ends meet.
According to the Bank of America Institute, around a quarter of all households are currently living paycheck to paycheck. And this situation isn’t limited to those with low incomes. Anyone can fall into the paycheck-to-paycheck trap if their expenses are too high compared to their earnings.
If you find that your paycheck doesn’t last between paydays, here are a few common reasons why that may be the case:
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Your income doesn’t match your expenses: If your income isn’t keeping up with higher costs for everyday goods and services, you might find it increasingly difficult to cover your groceries, housing, and other recurring bills.
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You’ve fallen victim to lifestyle inflation: This is when your spending increases along with your income. Getting a raise or a new, higher-paying job can be exciting and give you a financial boost, but earning more income can also tempt you to spend more and splurge on items you don’t really need.
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You have expensive debt payments: The more debt you have, the more money you put toward interest charges and monthly payments instead of your daily expenses and savings goals.
The first step in breaking that cycle is understanding why it’s happening. Once you can pinpoint where your paycheck is going, it’s time to get your financial house in order.
Budgeting helps you see where your money is coming from and where it’s going. By having a budget in place, you can create a plan for every dollar you earn and identify areas where you may be overspending.
So, if you haven’t set up a budget, now is the time to do so. You can create a budget from scratch using Excel, or if you’d like some help, sign up for a budgeting app that can connect all of your financial accounts and automatically categorize transactions.
Once your budget is in place, review your spending to find out if you’re paying too much for certain services. If so, spend some time negotiating rates with service providers, canceling the memberships and subscriptions you rarely use, and reigning in your discretionary spending.
“Paying yourself first” means you prioritize saving a portion of your income before you spend money on anything else, like bills, groceries, or entertainment.
If you suspect the reason you’re living paycheck to paycheck is because you’re an overspender or give into impulse purchases, try incorporating this strategy. Each payday immediately set aside a portion of your income into your savings account. Then tackle your bills. Any money left over is yours to spend on entertainment, shopping, or any other non-essentials.
Read more: How much of your paycheck should you save?
When an unexpected expense comes your way and money is tight, you may resort to putting it on a credit card or taking out a new loan to cover it. The trouble is that it results in a new monthly payment, continuing the paycheck-to-paycheck cycle.
So, as you contribute to your savings account, set a goal to save up three to six months’ worth of expenses. Then, if a surprise expense comes up, you can dip into your savings instead of taking on more debt. Bonus points if you put those funds in a high-yield savings account, which helps your money earn more money.
If you have debt, especially high-interest debt like credit cards or payday loans, a good portion of your income is going toward interest charges and fees. Eliminating that debt will free up more money to put toward important expenses and savings.
You don’t have to pay off your debts overnight, though. Focus on making extra payments toward the debt with the highest interest rate first. Once you’ve paid it off, you can focus your efforts on the next-highest-rate debt, and so on. With consistency and patience, you’ll get rid of your debt and have more money to spend on the things that are most important to you.
Read more: How to pay off credit card debt when your budget’s tight
It’s easier said than done, but the most effective way to get out of the paycheck-to-paycheck cycle is to earn a bigger paycheck. Maybe it’s a good time to negotiate your current salary and make a case for a raise at work, or look into switching to a higher-paying role.
You could also add a second stream of income by taking on a part-time job or side hustle — even a few hours a week can make a big impact on your cash flow.