More than three quarters of full-time workers live paycheck to paycheck. Here’s how to break the cycle and improve your financial outlook.
Pretend You Earn Less Than You Do
While it may be easier said than done, simply committing to live on less than you earn is the first step toward breaking the hand-to-mouth cycle. If you just spend less than you earn after taxes, you will have “a budget surplus,”.
Once you start having money left in the bank at the end of every pay cycle, you’ll begin to feel a little freer. You can begin stashing away some savings so you’re prepared to handle the inevitable rainy day.
Create a Budget
To live below your means, you must know where your money’s going. Start by creating a realistic budget if you don’t have one already. Try Google Docs (it’s free), which allows you to create a spreadsheet and share it with other spenders and contributors to your household income.
Build an Emergency Fund
Even if you start very small, it’s vital to begin setting aside savings to build up an emergency fund. Review your budget and break it down into non-discretionary and discretionary expenses. Non-discretionary expenses include rent or mortgage, groceries, utility bills and insurance payments. Discretionary spending includes eating out, entertainment, clothes and shoes.
Once you’ve broken your spending into categories, cut some of that discretionary — even if it’s only $100 per month — and set it aside in savings.
If your discretionary spending is already extremely low, it may be time to consider making a lifestyle change. That may mean moving to a cheaper house or apartment, dropping the expensive gym membership and opting to walk or jog in a nearby park, or trading in an expensive car for something with less flash and better gas mileage.
Pay Down Debt
If you have significant debts hanging over your head, that is likely to be a chief reason for your paycheck-to-paycheck existence. Make a commitment to start getting out of debt immediately. It may be a long-term commitment, but slow and steady wins the race.
Don't Forget Your Future
If you have access to a 401(k) or IRA at work, take advantage of it. Contribute 3 percent to 4 percent, increasing your contribution as your comfort level grows. And if there’s a company match, take advantage of it. Otherwise you’re leaving free money on the table.
In addition to a regular contribution, each time you get a pay raise, allocate a portion of it to increasing your 401(k) contribution and a portion of it to your savings account. If you take savings out of those salary increases, you won’t even have time to miss it. But it will be there when you need it.