Living paycheck to paycheck means you’re earning just enough to survive each month and nothing more. It’s a common dilemma plaguing the millennial generation, and some older generations as well. You may not have an emergency fund, and when you run into a situation and need extra cash, a credit card might be your only option.
It’s a vicious cycle that can continue for years unless you take steps to reverse the situation. However, before you can create disposable income, you have to understand why you’re living paycheck to paycheck.
1. You’re living above your means
If you live above your means, you have too many expenses and not enough income. For example, if you bring home $4,000 a month after taxes and other deductions, and your monthly expenses equal to $4,000 or more, you’re living above your means. It’s dangerous to live at your max because this doesn’t allow any cushion for incidents. Since life can throw us curveballs, everyone needs a financial cushion to keep their head above water.
Take a look at your monthly expenses to see where you can cut back and then revamp your budget. A budget is a spending plan, and one of the best ways to make sure you’re not overspending every month. Consider how much you pay for housing. Money experts recommend spending no more than 28% of your gross income on housing expenses. If your rent or mortgage is much higher, say up to 50%, it’s time to downsize. Getting a cheaper car and significantly reducing how much you spend on recreation and entertainment can help you live within your means.
2. You have too much debt
This includes any type of debt from credit cards to auto loans. Monthly debt payments can take a big chunk of your income, and if you’re spending a large percentage of your money repaying creditors, there might be little left for living expenses or saving. You’re not going to erase your debt overnight, but if you get serious and make a few sacrifices, you can get out from under a mountain of debt and give your budget some wiggle room. Several tricks can eliminate debt faster. For example:
Make bi-weekly auto loan payments to reduce how much you owe in interest, and pay off the balance faster.
Negotiate a better interest rate with your student loan lender or credit card company, or transfer your credit card balance to a 0% interest card to save on interest and pay off the debt sooner. Also, make higher minimum payments every month.
Speak to your employer about extra work or look for part-time work on the weekends. All extra income can go towards paying off your debt. If you earn an extra $500 a month, you can pay off a $6,000 credit card in about 12 months.
3. You’re afraid to challenge yourself professionally
If you need additional income, it might be time to look for new job opportunities. Don’t be afraid to move past an entry-level position and challenge yourself, especially if you have the experience and know-how. Fear can keep you stuck in the same place through the duration of your career. Given how the cost of living isn’t getting any cheaper, sometimes we have to step outside our comfort zone. This can include going back to school and acquiring a new skill, or simply applying for better paying jobs that match your present skill level.
4. You didn’t plan for unexpected expenses
If you don’t have a rainy day fund, an unexpected expense can catch you off guard and practically force you to use a credit card. And when you use a credit card for purchases, you create more expenses for yourself, which can hinder saving – can you see how the cycle works?
Even if you’re just starting your career and you don’t have disposable income, you need to be saving something each paycheck. It doesn’t have to be a lot of money. Although money experts recommend saving at least 10% of each check, you can start with less, such as 2% or 3%. Treat you savings account like another bill, and pay yourself before paying your creditors. Also, look into higher yielding savings options to maximize your deposit, such as a money market account or an online high-yield savings.
See also: How Are Americans Planning to Save Money in 2015?
Living paycheck to paycheck is an unpleasant reality, especially among younger employees. But you can escape this trap. If you get to the root of your financial troubles and make the necessary improvements, you can increase your income and enjoy more disposable income.