If you are struggling to cover your expenses each month, you are not alone. In fact, the majority (59%*) of Americans live from paycheck to paycheck. Bills and expenses can quickly devour your monthly pay, leaving you with little savings. And the same repeats each month.
The paycheck to paycheck rut is a vicious cycle that is hard to escape. Moreover, it also puts you in a dangerous position during a crisis. The Coronavirus crisis has revealed the financial weaknesses of many Americans. With businesses closing down, many workers lost their paychecks and are subsequently pushed to the brink of poverty. In many states, people are lining up for miles to receive food donations from charities and local governments.
Nothing can motivate changes like a crisis. If you are determined to escape the paycheck to paycheck rut, now is the time to do it. If you are suffering financially from this crisis, let it motivate you to make some changes in how you manage your money. Escaping this rut is difficult. It requires you to be extra smart about how you spend and manage your money. To support you, here are the most actionable strategies you can use to escape the paycheck to paycheck rut. We ordered the tips based on how easy they are to put to action, so you can have a progressive action plan!
Set up Auto Payments
Here is a question for you – how much did Americans pay in credit card late fees last year? A few million? A hundred million? The answer is a surprising 2.5 billion dollars. And that’s just the late fees on credit cards! If we add up the late fees from utilities bills and mortgages, the number would be much larger.
Late fees are expensive. On average, late fees for credit cards are $30 and more. When you live paycheck to paycheck, you need to make every penny count. You MUST prevent late fees from taking away your hard-earned money. Many people are charged late fees because they simply forgot to pay the bills. Thankfully, there is an easy solution to this problem – auto payments.
When you set up an auto payment for your credit cards, the credit card company will receive your monthly payments automatically from your bank. This guarantees that you will never pay a late fee again. Auto payments are easy but effective. We recommend everyone to set up auto payments on all their credit cards. Taking it one step further, you should also set up direct payments for all your bills. This simple action eliminates late fees completely so you can use your money where it counts most.
Go through Your Bank Statements Weekly
Cutting expenses is a great way to escape the paycheck rut. The less you spend, the more you can save and invest. Moreover, when you spend less money, you are also less dependent on your paychecks. Of course, you can’t cut expenses effectively, if you don’t know how you are spending your dollars and cents. Surprisingly, many people don’t review their bank statements regularly, out of fear and discomfort.
Reviewing your spending history is not the definition of quality time for many people. The key is to set up a fixed time each week to form a habit and make it bearable by rewarding yourself each time. For example, you can schedule an hour every Wednesday night to go through your bank statements. While you are doing that, treat yourself to a donut or something else you enjoy as a reward.
Reviewing transaction history is super helpful in cutting expenses. First, it gives you the chance to catch errors in your statements. For example, I caught a few vendors charging me twice for a transaction during my weekly reviews. You might also catch the recurring charges from a subscription or a magazine you forgot to cancel. These are free savings you get just by being diligent.
Secondly, reviewing your statements helps you understand HOW you are using your money. Small expenses often build up without us noticing it. Let’s take coffee for example. A cup of coffee is not too expensive and most of us don’t think twice before ordering a cup of joe. However, when we add up the coffee money for a whole month, the number is often surprisingly big and wasteful.
Switch to Cash
If you really want to save more money and cut spending, a hardcore but effective way is to switch back to cash for your daily transactions. Cash is inconvenient to use but in this case the inconvenience actually helps you save.
Many studies have shown that shoppers are likely to spend more when they use credit cards. Using cash prevents overspending. You spend what you have in your pocket and there is zero chance of getting into debt this way. Additionally, spending cash feels more real than swiping a plastic card. When you buy something with cash, you are more aware of the cost, thus reducing impulsive purchases. In fact, there is a well-tested budgeting method based on using only cash – the envelope budgeting method.
The envelope method is simple but effective. At the beginning of each month, you put cash into different envelopes, each of which represents an expense item such as rent or groceries. Then for the rest of the month, you only use money in these envelopes to cover different expenses. This way, you can visually see how much money you have left in each envelope and adjust your spending accordingly.
If you are not willing to switch fully back to cash, just use it as much as you can. Next time you go to the stores, try leaving your cards at home and only bringing cash. It will still help you save more money and spend less.
Make Your Savings Work for You
All the tips above are about cutting expenses. Once you have cut down your spending, you can begin thinking about making your savings works for you. To escape the paycheck to paycheck rut, you need to build up your savings. What you do with your money makes a big difference in how fast your savings can grow.
While many people put their savings in a savings account and forget about it, you can get better returns with other saving products. For example, Certificates of Deposit (CDs) are a savings product that is as safe as your bank deposit. CDs also offer higher interest rates than a savings account. Sometimes the interest rate on CDs can be 400% higher than a regular savings account; higher interest rates bring you more return and help you escape the paycheck rut sooner!
CD is only one way to make your savings work for you. You can also invest some of your money into bonds or even stocks. The more investment you have, the more income you will receive. As your portfolio grows, your investment income can help you pay your bills and make you less dependent on your paychecks.
Get a Side Hustle
The problem with living paycheck to paycheck lies in one’s dependency on their salary. Cutting expenses helps, but it can only get you so far. If you already live a minimalistic lifestyle, budgeting will not help you gain more financial stability. If that is the case, the key to escape the paycheck to paycheck rut is to increase and diversify your income stream.
This means that you need to have something else that pays you, other than your main job. The fastest thing you can do is to get a second job. A part-time job helps you pay the bills and save more. It gives you the income boost you need to break the paycheck to paycheck cycle. So if your energy and time allow, try to look for a second job.
However, just having a part-time job is not a complete solution to the problem. For example, many workers furloughed during the Coronavirus crisis had multiple jobs and they lost all of them because of the economic downturn. Having two jobs doesn’t provide much more protection than having one, because both jobs are vulnerable to the same risks. To overcome this vulnerability, you need to have a side hustle, something that’s different from your main source of income.
A side hustle can give you more protection from uncertainties. The more control you have over this income, the more protection you have. To find the ideal side hustle, you have to play up your strength. Everyone has different strengths and there is an infinite amount of side hustles to make money from.
Here are some ideas for money-making side hustles:
- Open a drop-shipping store on Shopify
- Teach English lessons online. China has a huge market for online tutors and often offer good rates for native speakers
- Sell arts and craft products you make on Etsy
- Offer professional services (graphic design, video editing, etc.) on Fiverr
Break the Cycle
Living from paycheck to paycheck is both stressful and dangerous. Breaking this cycle is not easy. It requires determination and smart money management. However, by taking these steps, you can gradually strengthen your personal finance and leave more and more money in your pocket. All your efforts will pay off handsomely in the form of stability and security when you face the next crisis.
*Modern Wealth 2019 by Charles Schwabs
