How to Stop Living Paycheck to Paycheck

Many Americans are living paycheck to paycheck and finding it difficult to pay their monthly bills. According to a recent study by PYMNTS.com, even high-earning households are finding it difficult to live on their income. Reasons include: inflation and the rising cost of living, failure to budget properly or at all, a lack of financial literacy and lifestyle creep.

While wealthier Americans may have more wiggle room when it comes to downsizing their lifestyles, what can the rest of us do to stop living paycheck to paycheck?

Here’s a look at the paycheck-to-paycheck problem and some practical ideas to live and spend differently.

How to Know If You Are Living Paycheck to Paycheck

Most people expect to earn a living wage. What constitutes a living wage depends on where you live. In some areas, necessities like housing, food, and transportation are much more expensive (New York and California, for example). However, the demand for labor will typically cause wages to be higher in these areas, too.

A living wage should provide you with sufficient income for critical items but should also allow you to save for an emergency, retirement, and other goals. If you find it difficult to pay your basic bills and have nothing left over to save for a rainy day, you are living paycheck to paycheck. This is not a good place to be.

What happens if you get an unexpected medical bill? What if you need new tires for your car? What if you become ill and cannot work for a time? What if you lose your job? A sudden, unexpected event could upend you financially if you don’t have a cushion or an emergency fund.

Without the ability to save for an emergency fund, you may have to turn to expensive financing (and solutions not recommended by financial experts) to cover your costs, such as high-interest credit cards or payday loans.

Why do so many people live paycheck to paycheck?

Reasons so many people find themselves living paycheck to paycheck vary. They may include inflation, salaries that do not keep up with the cost of living, a lack of financial literacy, and lifestyle creep. Let’s take a closer look at these blockers:

Rising Cost of Living

The cost of living is always increasing because of inflation, so most of us feel the effects. According to the Federal Reserve, sixty-five percent of adults said that price changes in rent, mortgages, payments, food, and utilities worsened their financial situation in 2023 compared to the previous year. That means that unless our incomes are going up at the same rate as inflation, we all must find ways to reduce our expenses.

Failure to Budget

Many people fail to create a budget. A budget is a tool that tracks all your expenses and your earnings. If you have a budget, you can see where your money is going and adjust how you spend. Without a budget, it is difficult to know whether your expenses exceed your incomings, and this is vital information if you are to take control of your finances.

Lifestyle Creep

People who earn minimum wage or live in areas with a high cost of living are particularly vulnerable to living paycheck to paycheck and falling into debt. However, high-income earners are also guilty of living beyond their means. According to a PYMNTS Intelligence report, two-thirds of consumers who find it challenging to meet their monthly bills and have no money left over for savings.

Whatever their income, people tend to have certain expectations when it comes to their standard of living. As they progress professionally, people expect similar advancements in their standard of living; this is lifestyle creep.

If you get a promotion, you might reward yourself by financing a new car, buying an expensive new wardrobe, or splashing out on a luxury vacation using a credit card. Unfortunately, the raise may not be enough to support your new lifestyle, pay off the resulting credit card debt, and allow you to save for an emergency or retirement.

The Effect of Living Paycheck to Paycheck on Your Health

Living paycheck to paycheck does not just affect your bank account; it affects your health. It is stressful to worry about how you’re going to pay your bills or to see the balance continue to climb on your credit cards as you pay off the minimum balance each month.

A study by MarketWatch found that close to 50 percent of Americans say that 2024 has been the most stressful year of their lives, and 42 percent say they avoid looking at their checking account balance out of fear. The fallout of stress can be depression, anxiety, panic attacks, substance abuse, and relationship problems.

So, what can you do to break the monthly cycle, improve your finances, and ultimately, your health?

How to Stop Living Paycheck to Paycheck

There are many ways to improve your financial situation. Here are some ideas.

1. Create a budget.

Before you fix a problem, you need to identify the problem. A budget will show where you are spending too much and help you identify areas where you can economize. Here’s how to create a budget.

• First, write down your expenses each week for a month. Record them on a spreadsheet. Make sure you record everything you spend from chewing gum at the gas station to interest on your credit cards. There are apps available that will help you track expenses, just make sure they capture all your accounts and your cash spending.
• Next, once you have all your expenses written down, categorize them. For example, rent or mortgage, groceries, utilities, transportation, entertainment, and credit card interest.
• Now, consider what expenses are critical and what you can do without. For instance, you could brew your own coffee and eat breakfast at home rather than stopping at Starbucks. That alone could save around $1,000 a year. The goal is to reduce expenses so that they are less than the income you have coming in.

If, after reducing your expenses, you still have a deficit, you may have to look at making some bigger changes and finding additional streams of income (see number 4 below).

2. Manage your debt.

Debt is expensive. High-interest credit card debt and buy-now-pay-later (BNPL) schemes can eat up your income. Consider consolidating the balances with a personal loan if you have significant credit card balances with high interest. You could also transfer the balance of a high-interest credit card to one with a lower interest rate.

Most banks and financial institutions can help you with debt consolidation, and a credit counseling agency can help you create a debt management plan. A debt settlement program can help you negotiate with creditors so that you pay a lower amount than you currently owe. Be sure to fully understand how the program works and research the companies you’re considering working with because these programs can be risky.

Consolidating your debt will likely lower the amount you pay in interest, and you will only have one bill to pay each month. Just make sure you don’t keep spending on those credit cards. While it’s still important to save for a rainy day, paying off debt should be a main priority.

3. Build an emergency fund.

An emergency fund is an amount of money that you have saved in case something unexpected happens. Most financial experts recommend having six months’ worth of savings in an account that you can access. So, if you spend $5,000 a month on housing, food, transportation, and other expenses, you should have $30,000 in savings in an emergency fund.

With an emergency fund, if you suddenly have to pay for something you didn’t expect, or you need additional income temporarily, you don’t need to turn to credit cards or an expensive loan. You can use your fund to pay for your unexpected expense and then work to replenish the fund going forward. That’s preferable to borrowing and paying high interest on a loan.

Once you have enough saved in an emergency fund, you can then start saving for a home, retirement, or investing to give you a more secure financial future.

4. Look for additional income streams.

If you spend more than you earn or do not have enough in your paycheck to allow you to save, you could look for ways to increase your income while living more frugally. You may find relief quicker than you might think, and the changes you make may only have to be temporary. Here are some ways to increase your overall income:

Ask for a raise.

Asking for a raise may feel uncomfortable, but it could be well worth it. According to Payscale.com, 70 percent of survey respondents who asked for a raise got one. If your employer values you, you really don’t have much to lose by asking for a raise.

Get a roommate.

Getting a roommate could halve your living expenses and free up quite a bit of cash. You could use that cash to pay off credit card debt or save for your rainy-day fund. Think of it as a temporary solution while you pay off debt or get back on your feet financially.

Try gig work.

To supplement your income, a side hustle could get you through a difficult financial time. Can you freelance remotely and do some part-time graphic design, coding, online tutoring, or social media management? Do you have a skill that others might want to learn and that you could teach? You can sign up on sites like Upwork and Fiverr to find freelance gigs, and Tutor.com and VIPKid is a platform for connecting with students and remote teaching.

5. Hold off on big purchases.

Hold off on buying big-ticket items as best you can. Sacrifice a vacation for a year or manage with an older car until you are in a better place financially. Don’t be tempted by buy-now-pay-later schemes as these will only put you into debt, and that is what you want to avoid.

Taking Financial Control

Many Americans are finding it hard to live within their means. Even high-earning households can fall into the trap of lifestyle creep and over-indulgent living expenses, all of which create worry and stress.

To stop living paycheck to paycheck, monitor your expenses and create a budget. Know where your money is going and make changes to your spending habits. Make sure your expenses do not exceed your incomings, and use the excess to build an emergency fund to avoid having to go into debt. If you have substantial credit card debt, consider consolidating it with a lower-interest personal loan.

If need be, seek professional help to tackle your finances. Living within your means is less difficult than you think once you take control.