The following is a post by MPFJ staff writer, Kevin Mercadante, who is a professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.
A lot of people dream of the day that they’ll have enough money saved and invested that they’ll be able to live the way they want, to have the things that they want, and be able to come and go as they please. But you won’t ever be able to reach that point if you aren’t able to accumulate the savings and investments that will make it happen. And you won’t be able to do that until you learn to break the cycle of living paycheck-to-paycheck.
If you are in that situation, here are some ways to break the cycle so that you will be able to accumulate the kind of money that you’ll need to live the life that you want.
1. Cut your expenses across-the-board – or just a couple of big ones
Weaning yourself off the paycheck-to-paycheck merry-go-round won’t be accomplished without cutting your living expenses. You’ll need to do that in order to create room in your budget so that you will be able to build the level of savings that you need that will put an end to the negative cycle once and for all.
There are two basic ways that you can do this:
Cut all expenses across-the-board – You can do this by making a percentage cut across your entire budget. For example, if you are currently spending $3,000 per month, and you decide to cut your budget by 10%, you’ll free up $300 per month that you can put into savings.
Make big cuts in a couple of big expenses – If you don’t like the idea of cutting all of your expenses at the same time, you can target two or three big ones and make deep cuts there. For example, let’s say that you are paying $1,300 per month for your house payment. By moving into smaller quarters at $1,000 per month, you’ll free up $300 per month for savings. Similarly, you can dump a car that has a $400 per month payment on it, in favor of an older car that you can afford to buy for cash, and thus eliminate the monthly payment. That will provide $400 per month for savings, or $4,800 per year!
2. From now on – no new debt
A lot of people believe that in order to break paycheck-to-paycheck cycle, you first need to get out of debt. While that certainly would go a long way toward creating surplus in your budget, you don’t necessarily have to pay off all of your debts before your situation begins to improve.
Simply by avoiding new debt, your financial situation will begin to improve over time if only gradually. Just by making your required minimum monthly payments on each of your debts, the loans will begin to be paid down, and eventually you’ll pay them off.
But the key is always to avoid adding debt to your existing pile of debt. If you can at least do that much, your cash flow will gradually improve, helping you to break the paycheck-to-paycheck cycle. And you won’t have done anything radical to make it happen.
3. Commit to a long-term plan to increase your income
You probably won’t be able to do anything as dramatic as increasing your income by 50% in the next three months – and the truth is that you don’t have to. All you need to do is commit to a plan to increase your pay over the long-term.
There are various ways to do that, but the least taxing way may be to plan on doing several:
- Get a part-time job – an extra $200 per month will enable you to save $2,400 in one year.
- Start a side business – assess your best skills, then work on hatching a plan to monetize them by selling your services to the general public.
- Plan on getting a better paying job in the next year – with the understanding that you may have to pick up a new skill or two in order to make it happen.
- Look into buying and selling – find a product or product line that you’re particularly interested in, and start selling it as a sideline.
- If your compensation includes commission or bonus income, get serious about increasing your results.
- Find ways to monetize your situation – like renting out a room to a boarder.
You don’t have to do any of the above for the rest of your life, but just long enough to get enough money put away that you’re in control of your financial situation.
4. Redirect any and all freed-up cash into savings
Whether you are improving your cash flow by cutting your expenses, increasing your income, or both, it’s vitally important that any additional cash from these activities be directed into savings. The idea isn’t to create additional cash flow so that you can buy more stuff, but to accumulate the kind of money that will eventually lead to something that looks like financial freedom.
The best way to make that happen is by making it automatic:
- Take advantage of direct deposit with your paycheck, by having some of your pay direct deposited into your savings account.
- Have your income tax refund direct deposited into your savings account.
- Make it a policy and a habit to deposit any additional income into your savings immediately – as in before you have time to think about it.
If you’ve never been into saving money in the past, it will be very important to make sure that the money goes to its intended destination – and that’s your savings account.
5. Investing your savings makes it permanent
This is the final step, because it makes saving money permanent. Once you begin moving your money into investments – like stocks and mutual funds – it will be “tied up” and therefore unavailable in case you’re tempted to spend it.
Investing money can also provide outstanding motivation. The prospect of being able to earn money with money that you already have can turn investing into a lifelong pursuit. And once you’re earning money on your investments – in addition to earning extra income and cutting expenses – your move away from living paycheck-to-paycheck will become almost effortless.
How about you all? Are you having trouble breaking out of the cycle of living paycheck-to-paycheck?
Share your experiences by commenting below!
***Photo courtesy of https://www.flickr.com/photos/orphanjones/677386754/sizes/n/
