How to Stop Living Paycheck to Paycheck

“Too many people spend money they earned to buy things they don’t want to impress people they don’t like.” – Will Rogers

If you’ve ever lived paycheck to paycheck, you know that it’s both financially and emotionally stressful. Although research shows that most American households live this way, a hand-to-mouth lifestyle can be disastrous, especially if your car breaks down, you need to take extended sick leave, your job lays you off, or any other unexpected emergency happens.

Breaking the cycle of paycheck-to-paycheck living isn’t easy, but having peace of mind is worth the effort and sacrifice. Family finances are always important. One of our family’s proudest accomplishments and greatest sources of contentment comes from conquering our debt and getting off the “struggling to make ends meet” treadmill. Anyone can learn how to stop living paycheck to paycheck. Follow these six steps to financial freedom:

Step 1: Get your mind right

Whether or not you realize it, you probably choose to live paycheck to paycheck. Your choices are based on your values. If you value a life of material comfort and consumerism, you’ll always spend money, even if you don’t have it. But if you value a life of financial freedom, you’ll go the extra mile to save a dollar. The life you live is the sum of your choices, values, and actions. So be very clear about what is important to you and keep reminding yourself when you feel tempted to give up on your goals.

Part of getting your mind right is being realistic about why you’re in your current financial situation. Take responsibility for your actions instead of blaming your employer, the economy, or the fancy marketing behind some new gadget. Identify what triggers your behavior. Are you addicted to shopping? Do you spend money to compensate for some other void in your life? Are you too lazy to budget and price compare? Do you like to have new material things as a way to pretend you’re someone you’re not? Do you just not know where to start? Are you overwhelmed by your finances and would rather run away from it than tackle it head on? Is there a way your family can work together to become financially fit?

Sometimes it takes a few “Jedi mind tricks” to get yourself over the hump:

  • Live below your means. Pretend you earn less than you do.
  • Literally snap out of it. Every time you feel an impulse to buy, snap your fingers and walk away
  • Grow an aversion to “more stuff”. Let the thought of bringing one more item into your life repulse you
  • Imagine your worst money nightmare. Perhaps having your car repossessed or your home foreclosed – and wishing that you hadn’t spend the money you’re about to spend.

Step 2: Stop the bleeding

Drop your bad money habits once and for all. They might include:

  • Using money you don’t have. Immediately stop using your credit cards, don’t take out store credit lines, and quit borrowing money whether it’s from the bank or your grandma.If you need to pay for anything, you can do so via automatic bank deduction or with cash that’s hard to let go of. It’s OK to keep one debit card but only if it has a hefty incentive which pays you, such as a cash back or miles reward program.
  • Shopping without need. Maybe you’re bored, maybe it’s entertaining, maybe you lack self-control like a hormone-crazed teenager. Whatever the reason, learn to value need over want and buy only what you absolutely need. There are many apps that can help you find the best deals. For example, Safeway has a mobile app that will match the cost the groceries nearby. (That being said, sometimes I prefer to buy local, especially if it’s fresh produce from our farmers.)
  • Wasting money because you don’t cost-compare. Look for the best deals on everything from utilities to cell phones to clothes, groceries, and bank fees (Simple has no overdrafts and no minimums!) Of course, the cheapest item doesn’t necessarily mean it’s the best item. For example, I am willing to pay more for healthier, organic foods instead of feeding my family with a fast food dollar menu. I also prefer to buy a used unlocked cell phone and monthly minute cards than commit to a 2-year cell contract just to get a free phone. But at the same time, I power my home with solar energy, buy only used cars, and shop only the clearance racks. So it all evens out. The principle is that I cost-compare so that I don’t waste money.
  • Refusing to downsize. Do you really need a TV in every room, a car for every driver, the latest gadget, and a closet full of clothes? Probably not. Be brutally honest about where you can afford to trim the fat and then trim it! Besides, a simple life is a happy life.
  • Not counting the small things. Yes, a $5 smoothie might seem like just $5. But it all adds up and if you get a $5 smoothie just twice a week, that’s $52o a year in smoothies! When I had a regular hourly job, my rule of thumb was not spending more than 1 hour per workday of my income on discretionary spending. So when my hourly wage was $20 per hour, it meant that I didn’t budget more than $400 per month on discretionary spending. At the same time, I made sure not to spend more than I saved. If something cost $40, I would ask myself, “Is this worth 2 hours of my workday?”
  • Not using automatic payment. As much as possible, try to pay your bills through automatic deduction. If you don’t see it, you won’t spend it. You can also save money through automatic deduction. This is a great way to cut out the temptation of spending more than you can afford to.
  • Not doing your research. In this age of rapid and [mostly] reliable information, there is no excuse to be in the dark about personal finance. You no longer need a fancy CFP or even a 2-year magazine subscription to show you the ropes of simple budgeting and even investing. There are many great websites and resources readily available for free! So do yourself a favor and get educated. You can start with Yahoo! Personal Finance, Finance at Khan Academy, Money 101 at CNN Money, and/or Dave Ramsey’s Seven Baby Steps. If you need a little incentive, the Earmark app can help. Pioneer Mint and newcomer Level are powerful budgeting apps but they’re certainly not the only ones. Get Rich Slowly and The Simple Dollar are popular and useful finance blogs.

If you don’t stop your careless spending and don’t actively go after ways to save money, your finances and peace of mind will only continue to bleed out until everything is wasted. Bottom line: Stop getting into more debt!

Step 3: Assess your situation

Time to get out your favorite financial tracking software, budgeting app, or just a pen and paper. Write down:

    1. How much you make. Whether you’re paid hourly or salary, figure out how much you make for each specific month. (Some months have more weeks than others.) If you have a fluctuating income, like our family does, pinning an exact amount can be difficult, so go with a low number. Figure out your monthly income for the next 12 months.
    2. List your bills. This includes both your rollover debts, such as mortgage and loan payments, as well as monthly bills, such as insurance, utility, and phone bills.  A simple spreadsheet that lists the debtor, debt amount, interest, terms, and contact info is a great way to get a snapshot of your bills. List all of your bills, including the ones you’re trying to forget! Confronting them is the first step to making them disappear for good.
    3. Bonus: Get one month ahead. Saving enough to get one month ahead can make a big financial and emotional difference. This might seem like a lot of work but it’s especially helpful if you have a fluctuating income as it helps to avoid the panic of “budgeting in the moment”.

Taking a good hard look at your finances is a required precursor to all the steps that follow.

Step 4: Stick to a Zero-Sum Budget

Your income is your path to wealth. The best way to harness the power of your income is by having a monthly budget. Don’t be afraid to make a budget. It needn’t be all bread and water until you pay off every last cent of your debt. Budgets aren’t boring taskmasters; they are freedom tools! Don’t let the fear of facing your finances paralyze you. Do something! No matter how much debt you’re in, know that you can get out from under IF it you set and stick to a budget.

Setting a budget is easy – everything seems to work out on paper. But sticking to a budget can be much harder, especially if you haven’t done Steps 1 – 3.

A zero-sum budget is an easy budget formula to use. Basically, you allocate every single cent of your income and spend all of your money on paper.

Zero-Sum Budget Formula:
Your income - your savings – your bills –  your discretionary spending = $0

While some argue that it’s best to spend first on your bills, our family believes in paying yourself first.  This means putting something aside for savings each month. (See how we adjusted our attitude to think of “saving” as “paying”? ;) ) 10% of your gross income is recommended, but $10 will suffice if it’s all you really have to spare. (But with self-discipline and frugality, you can probably find more!) You can further divide your savings into categories such as emergency fund, home downpayment, vacation fund or any other big expense. Making saving a regular part of your spending is the best way to divide and conquer and learn this good habit.

The main benefit of a zero-sum budget is that you know ahead of time where every cent of your money is going. Being clear about that one thing can make all the difference and prevent a lot of other problems common to piling up debt. To learn how to create a zero-sum budget, start here where it’s explained by renowned financial advisor, Dave Ramsey. He even provides an excellent and free Guide to Budgeting.

Step 5: Create a Debt Snowball

There are several approaches to paying off debt, but we prefer the “Debt Snowball Method” especially if you have more than one debt. This debt reduction strategy is about tenaciously paying off your small balances first while paying the minimum on larger balances. As each balance is erased, you take the money you put towards old debts (and any extra money you find) and attack the next debt on your list.

Systematically and energetically tacking each debt one by one gives you a sense of progress and accomplishment. You gain momentum with every payment and feel an invigorating sense of accomplishment to see your debt erased dollar by dollar every month – every day!

To figure out how fast you can get out of debt, you can use Dave Ramsey’s Debt Snowball Calculator online or download an automated Excel spreadsheet here from Vertex42.

Step 6: Track and tweak

Now that you’ve got the right attitude and a solid plan, it’s time to put it in motion and make it work. Periodically tracking your money and making necessary adjustments will help you to strengthen weak spots and create an even more awesome finance plan. While you probably won’t blow your budget by randomly splurging on a brand new car this month, you might overspend on groceries and miscellaneous items. So check in on those areas of your budget at least once a week. We’ve successfully used the Envelope System for areas which we had trouble staying within budget.

…Finally enjoy financial freedom!

Once you’ve completed these steps, you should be freed from the paycheck-to-paycheck slump. Now you can spend your money on living instead of debt! Remember that your goal is financial freedom. To not have debt, to not worry about money more than is absolutely necessary, to be able to trust yourself with your money, to know that you are financially prepared for the unexpected, to sleep easy at night knowing there’s money in your bank and you have sufficiently provided for your family – these will be the fulfilling fruits of your labor. After all the work you do to make money, it shouldn’t be work to worry about how to keep it. It may take effort and sacrifice to get your finances in order, but you will never regret being proactive with your money. Money can buy a lot, the best of which is financial freedom to live the life you truly want.

“Financial peace isn’t the acquisition of stuff. It’s learning to live on less than you make, so you can give money back and have money to invest. You can’t win until you do this.” – Dave Ramsey