Scraping by between paydays is a common way of life for a huge portion of the population – even among segments you wouldn’t suspect.
A recent survey found one third of households earning at least $75,000 per year are living on the edge financially. One fourth of those earning at least $100,000 per year find themselves without much left over at the end of the month.
The reasons for the discrepancy in income vs. expenses are varied. Some cite overspending as the culprit, others point to student loan debt or astronomical medical bills. Many found their savings depleted during the Great Recession and they haven’t managed to regain their financial footing.
While living paycheck to paycheck is clearly a huge financial burden, it also creates an endless cycle of stress that is extremely hard to shoulder.
If you know this struggle all too well, here are a few ways you can turn it around and make 2016 a year for building a financial cushion.
Get a grasp on what your financial obligations are.
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When the end of the month is fraught with stress because the money never quite seems to stretch that far, you know there’s a problem. While low income may be one of the culprits, understanding exactly why you are living paycheck to paycheck starts with the numbers.
So the first step is to get acquainted with the numbers of your specific situation – how much you’re bringing in, what’s going out and to where. It sounds simple, but we often never take a full-picture look at our finances. We simply bring money in, send payments out and hope there’s something left over afterwards.
Once you have broken down your financial picture number by number, you can start to recognize where the problems lie.
Find ways to live on less and save the difference.
How much of your money is allocated to bare bones necessities each month? How much of your current expenses are simply masked as necessities?
Creating a balanced budget and a cushion should unexpected emergencies arise means being discerning about what expenses your current income level can support.
Go through your budget items one by one with the mindset that virtually anything could be on the chopping block. Some expenses might need to be scaled back temporarily, others might need to be cut entirely.
Next, take your income, cut of a percentage – say, 10% — and work to divvy up the remainder between the expenses you have deemed necessary. Lowering your own income and learning to live off of what’s left means you can slowly build up a cushion for the unexpected emergencies that exacerbate the paycheck-to-paycheck lifestyle.
Finally, make a plan to save unexpected or expected monetary windfalls, like tax returns. That money isn’t usually accounted for in a budget, so keeping it untouched is relatively painless.
Don’t forget about financial obligations you don’t pay monthly.
Not taking into account expenses that must be paid yearly, quarterly, etc. can be a huge financial burden that ruins budgets for months to come. One of the simplest, yet most beneficial changes you can make to your budget in the upcoming year is to plan for these expenses by divvying them up amongst all 12 months.
Not only is this huge for planning purposes, but it can have a money-saving impact as well. For instance, many car insurance companies will offer a lower premium if it’s paid in full every six months. If you’ve planned ahead, this could finally be an option for you.
Make a list of the expenses that fall into this category, and determine how much extra needs to be saved each month to cover these in full when they arise.
Know when to automate and when not to.
If you’re living paycheck to paycheck, automating all of your bills might not be a convenience you can currently afford. When every dollar counts, you need to be aware of where it’s going and this ensures you don’t keep unnecessary spending – like subscriptions, for instance – on autopilot when they should be axed altogether.
However, there is one thing that should be automated: your savings. Those living the paycheck-to-paycheck lifestyle put savings last on the list of financial obligations, and that money often goes elsewhere. Instead, treat your savings like a bill and create a system that pulls it from your account at a designated time each month.
Systems like automatic withdrawal often lessens the financial pain we would feel if we were simply relying on willpower to aid in the change process.
How do you plan on getting out of the paycheck-to-paycheck lifestyle this year?