It can be incredibly difficult to break the paycheck-to-paycheck trap. Even if you earn a good income, saving up enough to cover unexpected costs or build an emergency fund can feel downright impossible, especially with crippling inflation getting in the way.
The truth is, there is no easy solution to breaking the paycheck-to-paycheck cycle. It takes hard work and discipline. It is still possible.
In this article, we’ll lay out some steps you can take to get your finances on track and stop feeling one step behind. We’ll cover:
- Common reasons people get trapped living paycheck-to-paycheck
- An exercise to help you nail down what’s holding you back specifically
- 5 steps for keeping better track of your money
- Ideas on how to decrease spending
- Ideas on how to increase your income
Let’s look at how you can escape the paycheck-to-paycheck trap!
Common Reasons People Live Paycheck to Paycheck
The first step toward change is awareness. The second step is acceptance.
Trying to break out of the paycheck-to-paycheck cycle can feel like an uphill battle. You’re not alone if you feel like you’re constantly swimming against the current.
Around 61% of Americans are living paycheck to paycheck. And it has little to do with your income. Even among those earning $150,000 to $200,000 a year, 41% have reported living paycheck to paycheck.
So, what’s keeping families trapped in this cycle? Let’s take a look at some possible reasons:
- Crippling inflation rates.
- Not earning enough money to cover basic expenses.
- Unexpected expenses that can’t be avoided, such as car repairs and medical bills.
- Living beyond your means.
- Mounting credit card debt.
- Not having a budget or spending plan.
- Poor money management skills.
You may relate to one or all of these. And that’s OKAY.
Around 75% of young adults in the U.S. don’t have access to financial education. This is awful because no one is born knowing how to be good with money. It’s a skill you have to learn just as you learn to drive a car or bake a cake.
And if no one has taught you how to be good with money up until this point in your life, you’re going to default to whatever your family has done or what society says you should do.
But here’s the truth: breaking out of the paycheck-to-paycheck cycle is possible, even if you’re trapped for reasons out of your control and even if no one in your immediate circle has ever done it before.
Exercise: Why Are You Stuck In The Paycheck To Paycheck Rut?
There are a million and one reasons why people live paycheck to paycheck. But to truly break the cycle, you need to come head-to-head with your personal situation. That way, you’re better prepared to turn things around.
So, first things first, grab a piece of paper and draw a line down the middle, so you have two columns. Then, label one Problems and the other Solutions.
In the Problems column, list what’s keeping you stuck in the paycheck-to-paycheck cycle.
- Inflation is rising and my income no longer covers my cost of living.
- I fractured my wrist and have a large medical bill I wasn’t expecting.
- I have a hard time sticking to a budget and tend to overspend.
In the Solutions column, write down one action you could take to alleviate this problem.
- Inflation is rising and my income no longer covers my cost of living. => Negotiate a raise, temporarily pause some discretionary expenses, or get a roommate.
- I fractured my wrist and had a large medical bill I wasn’t expecting. => Call the hospital and negotiate the bill down.
- I have a hard time sticking to a budget and tend to overspend. => Leave the credit card at home (and away from your computer).
When you accept that change is within your control, you’re more empowered to move forward. So in the next few sections, we’ll talk through some concrete steps you can take to get immediate results.
What Can I Do Today to Stop Living Paycheck to Paycheck?
You can’t manage what you don’t measure.
Step 1: Set Your KPIs
A Key Performance Indicator (KPI) is just a fancy term for identifying what you want to measure success against. Some people might simply call it a goal.
Goals are important because they give you direction on where you want to go. And, of course, goals are supported by carefully thought-out plans to get you to your destination.
It’s important that your goal be exciting and attainable. Don’t be afraid to challenge yourself, but remember to give yourself grace and celebrate small successes as well.
Tip: Remember that paycheck-to-paycheck exercise from above? Your “Solutions” could be your KPIs. Other examples could include paying down high-interest debt or building an emergency fund.
Further reading: So how can we set financial goals and actually achieve them? One proven answer is to set S.M.A.R.T. financial goals.
Step 2: Make a Budget
Learning how to budget may seem like a daunting task if you’ve never done it before.
But think of your budget as your game plan. When you falter, you can reset the following month and learn from your mistakes!
It’s not about being perfect, but being better.
An effective budget shows the following:
- The money that comes into your accounts (income)
- The money that goes out of your accounts (expenses)
- Any money left over (or under )
There are tons of different budgeting methods out there and it’s important to experiment to find the method that works best for you. If you’re brand new to managing your money, a budgeting tool can be a lifesaver.
The best budgeting tools automatically track your spending so you can spot where you’re overspending and make adjustments. They also connect to your bank accounts, loans, and credit cards, so you can track all your transactions in one place.
Step 3: Make Reasonable and Attainable Adjustments
With awareness comes responsibility and choice.
Don’t be surprised to learn that you may be spending more than you’re taking in. When people go through a budget for the first time, they are usually shocked by how much they spend!
The process of becoming aware isn’t always pleasant, but take comfort that now you’re in a position to do something about it!
Understanding your weak spots empowers you to decide which areas of spending you are willing to adjust in order to reach your goals.
First, let’s look at ways we can cut spending.
Step 4: Look For Ways to Decrease Your Spending
Before we dig into this, let’s first acknowledge that in some situations, you may not be in a position to decrease your expenses at all. You may have cut all you can cut and still not have enough money to cover the basics.
If this is you, consider looking into government assistance programs for low-income families, such as food stamps, Medicaid, unemployment benefits, or Welfare. Or, look for ways to increase your income (Step 5).
But for most people, there are going to be at least a few areas where you can “trim the fat” from your budget and free up extra cash. For many of us, there are more than a few.
Believe it or not, reducing your spending is a lot easier than you may think—and it can even be fun! My partner and I look at our budget every month with the intention of finding areas where we can save. When you “gamify” this process, it becomes less about sacrifice and more about fun competition.
Expenses You Can Shop Around For:
- Home and auto insurance
- Cell phone providers
- Gym memberships
Tip: Bill negotiation services can help you save hundreds on your monthly bills.
Expenses That Can Be Reduced or Eliminated:
- Unused or underutilized memberships or subscriptions
- Impulse shopping (leave the card at home or try a cash-envelope budget)
- Ditch expensive cable and opt for a wireless antenna
Other Ideas for Reducing Expenses:
- Host friends or family over for dinner or potluck instead of dining out
- Enjoy an adult beverage at home after eating out at dinner to keep bills low
- Pay off high-interest credit card debt with a personal or home equity loan
- Make coffee at home versus your daily Starbucks run
- Rent movies and books from the library instead of buying
Another important area to focus on is debt reduction.
With rising interest rates, you may have a more difficult time refinancing to a lower rate unless you’ve dramatically improved your credit score.
That said, there are a ton of great resources to help you learn how to get out of debt.
The Best Way to Reduce Expenses
When going through these cost-cutting exercises, remember that you don’t have to deprive yourself. It’s all about keeping what you love and ruthlessly cutting out everything else.
Identify areas where you’re willing to cut back and remember to save room in your budget to reward yourself for great behavior.
Further reading: Take a look at common strategies many people use to save money.
Can’t or don’t want to decrease your expenses? Then let’s look at a few ways to increase your income!
Step 5: Look For Ways To Increase Your Income
There are no two ways about it: if you want to improve your financial situation, you need to make more money.
Trimming spending is important, but at the end of the day, there’s only so much you can cut back, especially if you’re barely scraping by with the bare necessities.
So if you’re serious about improving your financial situation, focus on increasing your income. It’s the surest way to achieve your financial goals.
Tip: Sometimes more money means working more hours. You have to have a conversation with yourself to determine what you’re willing to do to bring more money in.
Here are a few pathways to more income:
Ask For a Raise
If you’re in a position to ask for a raise with your work, then you should absolutely approach that subject with your employer.
If you’re not sure the best way to approach it, we recommend reading through this Harvard Business Review article describing the best way to ask for a promotion.
Find a Better Job
The other option is to find a better job. There are times in our adult life when we have to ask ourselves if we still enjoy the work that we do.
If yes, then great! Find a higher-paying job doing EXACTLY what you’re doing today.
If not, no worries—there’s never been an easier time in history to switch industries than it is today. In fact, Finmasters has a great article on 20 jobs you can get with no experience. Check it out and see if any career paths spark your interest.
Other Ideas to Earn More Money
There are dozens of ways to earn money on the side. Some even have the potential to become full-time businesses. The key to finding a sustainable side hustle is to accurately assess your skills and abilities and find a way to monetize them. What works for someone else might not work for you!
Here are a few other ideas to consider as a side hustle to make more money in 2022:
- Start a podcast on a fun topic
- Build an online course and sell it to people who need your expertise
- Sell or license your ideas to companies
- Part-time social media management for local businesses
- Freelance copywriting
- Start a part-time photography or videography business
- Drive for Lyft or Uber
- Make food deliveries with Uber eats, door dash, or Grubhub
- Do freelance work on websites like Fiverr or Upwork
There are literally thousands of ways to earn more income. This list is by no means exhaustive but gives you an idea of what is possible.
Take Action Now to Break Out of the Paycheck to Paycheck Rut
If you’re living paycheck to paycheck, it can feel like you’re never going to get ahead financially. However, there are some concrete steps you can take to start getting your finances under control.
The best way to move forward is to implement what you’ve learned. The tools we discussed in this article should give you a strong foundation for improving your financial health.
Start with an exciting and attainable goal. Build your budget. Block two hours to go through your financial statements and TAKE ACTION on growing your wealth!