Best Practices

How to Stop Living Paycheck to Paycheck

by Jim Hughes   October 29, 2019

The majority of Americans find themselves in a financial stranglehold, living without enough cash savings to cover even a $600 expense. Here are some tips on how to save money when you’re living week to week.

Avoid the pitfalls of living paycheck to paycheck.
A 2017 survey conducted on behalf of CareerBuilder shed light on some surprising facts: the percentage of Americans living paycheck to paycheck was 78 percent, with women, at 81 percent, struggling slightly more than men, at 75 percent. Making more money didn't eliminate the problem altogether: one in 10 people who earned $100k a year and even more still reported living paycheck to paycheck, with nearly 60 percent of those in that income bracket also reporting being in debt.

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When people are straining for money by mid-week, this makes them vulnerable in many other ways, including:

  • being unable to build a retirement fund
  • having no emergency savings
  • being unable to save for vacations, large purchases, etc.
  • missing payments that will eventually impact their credit scores

These are daunting numbers, with even more daunting outcomes. Not only are employees suffering, but so are their employers as employees' financial worries increase their productivity decreases. So, what's the answer?

The solution is finding a way to stop living paycheck to paycheck.

No Longer Living Week to Week Financially

The first step toward no longer living paycheck to paycheck is creating a budget. This includes how much money is coming in, how much money is being spent on necessary things, and how much discretionary income is left over.

Necessary spending includes things that can't be parted with, like:

  • rent or mortgage
  • utility bills
  • insurance payments
  • car payments
  • student loans payments
  • child support obligations
  • food
  • cell phone bills

While the items on this list are necessary, many of them can be adjusted. Rent may be a concrete obligation, but utility bills can be lowered by adjusting the thermostat, so it doesn't keep the house as cool while no one is in it. Take short showers and use the dishwasher only when it’s full to lower the water bill. Shop around for the best car insurance quotes, then bundle items like car insurance and renter's insurance to save even more. Student loan payments can be extremely expensive, and complete student loan debt forgiveness is only available to a select few. However, adjusted repayment plans are easy to apply for by going through the student loan servicer who provided the loan. Food bills can be trimmed by limiting going out to eat and making cost-effective meals throughout the week. Change to a more affordable cell phone carrier to lower monthly phone bills.

There are other ways of trimming spending, such as:

  • buying energy-efficient light bulbs
  • carpooling to work
  • using coupons
  • inquiring about discounts for students, seniors, employees or locals
  • stopping unnecessary monthly subscriptions
  • ending gym memberships

The idea is to trim back wasteful spending until there is room to breathe.

How to Save Money Living Paycheck to Paycheck

Learn tips for saving money when cash is short.

Look at discretionary income next, which is whatever money that is left over after all bills have been paid. This is what's technically up to the spender to use however they see fit. This money is used to pay for entertainment, shop for clothes, spend on impulse purchases, and set aside for savings. The most important expense out of all these is savings, of course, but it must be pointed out that people need recreational outlets as well. Too much restriction leads to a buildup of stress. But free museums, concerts, picnics with friends, and afternoons grilling by the community pool are all wallet-friendly sources of relaxation.

About 20 percent of after-tax income should be allocated for savings and paying off existing debt. This amount may seem impossibly high for some people and rightfully so; however, it is important to have money in the bank to pay for an emergency. So is having money going towards retirement and paying down debt like high-interest credit card debt and loans.

Steps for Paying Down Debt

Experts recommend approaching saving money in a multi-tiered process:

  • Put no less than $500 away in a savings account in the event something goes wrong.
  • Look into an employer 401(k) contribution match. Have you got one? Then try to go for the maximum match; after all, it's free money.
  • Eliminate the most expensive, high-interest debt. If this step seems impossible to complete within five years, consider debt counseling or possibly filing for bankruptcy.
  • Contribute 15 percent of after-tax income to retirement.
  • Build up a savings equal to a full three- to six months' of living expenses in the event of a job loss or medical emergency.
  • Pay off remaining debt and, finally, continue tucking money into that retirement fund.

One effective way of saving money is to have a percentage of that paycheck automatically drafted into a savings account before it even becomes spendable. Likewise, employers often offer the option of squirreling 401(k) deductions, along with their matching contributions into a retirement account that employees can't access without incurring a penalty. The penalties are steep, too – a powerful deterrent that will help protect retirement funds.

Unexpected Emergencies

What about emergencies that happen before savings have been built up? What if it's midweek and Friday is just too far away? Loans are an option but approach with care. There are several types, such as personal loans, secured loans, and payday loans.

Payday loans and secured loans are typically serviced by banks and other lending institutions. Payday loans for emergencies usually rely on the state of an applicant's credit, his job history, and his debt-to-income ratio to determine whether the borrower receives funding. According to U.S. News, most personal loans range from $1,000 to $100k. Secured loans are those where the applicant's creditworthiness isn't enough to get the loan approved; instead, the applicant must offer something of value equal to or greater than the value of the loan amount as collateral. The drawbacks to these loans are they can take days to process, and there is the risk of losing the collateral.

Payday loans are short-term, small-dollar loans designed to help the applicant make it to the next payday. They act as a sort of stepping stone between paydays, as it were, but must be paid off in full with the applicant's next paycheck. Applicants typically don't need to have good credit and can get payday loans with a savings account or checking account. In some cases, they can even get online payday loans no bank account required as long as they have a prepaid debit card.

There are advantages and disadvantages to payday loans. The advantages are they can be a short-term fix for a short-term problem as long as the applicant can afford to pay them off immediately. They may be easier to get than other loan types. Applicants might get payday loans, in-person, or over the phone. The application process is such that some websites advertise "fast payday loans online!" The disadvantages are they are an expensive form of credit. If an applicant can't afford them, loan companies may allow them to roll the loan over to the next payday by paying the loan fee again. If an applicant takes out two payday loans at once, he can become caught up in a cycle of borrowing. As with any type of borrowing, payday loans must be approached with caution and knowledge.

Earn Extra Money

Want to beat the mid-week financial slump? Try making money on the side. Forbes recommends a number of clever ways of adding more money to the bank account, including:

  • asking for a raise
  • freelancing after hours
  • waiting tables
  • writing for a content website
  • starting a YouTube channel
  • walking dogs
  • cleaning homes or businesses

Going back to school to gain a greater foothold in a current career may be a viable option – or it may not. Creating fresh student debt may only be taking a step back. Gaining more valuable experience, learning from others who have great reputations in the same field, and volunteering time where it counts are all efforts that may yield results as worthy, and far less costly, than returning to school.

Jim Hughes   OpenCashAdvance Marketing Manager
Personal Finance
Jim Hughes remembers checking his first email on the original BlackBerry 850 nearly 20 years ago. It was spam, and he fell for it. Even so, he’s been on the beat every day since, following the ebbs and flows of financial technology. Look to Jim for insider exclusives on shorter-duration loans, installment loans, and other popular products in fintech today.