Are you stuck in the all-too-common habit of living paycheck to paycheck? You don’t need me to tell you that it’s a self-defeating cycle. You simply can’t get ahead this way. But escaping isn’t easy, especially if your paycheck is tight. Change involves not just the hard work of making new habits but, at a more-basic level, changing your ways of thinking.
And yet, people do make this leap. They pay off huge debts, reach ambitious savings goals and turn their financial lives around. If you intend to be one of them, here’s an eight-point road map:
1. Forge an independent spirit
Some people save money easily and intuitively. Others must come to it through struggle. If that’s you, becoming independent from the habits and opinions of your friends and family is crucial. You’ll need to stop trying — consciously or unconsciously — to keep up with the lifestyles of others, especially the spending habits, trends and consumption among celebrities and in the media.
When the pressure is on to spend, it takes a strong individual to buck the current. You must listen only to your own drummer. Keeping up with homes, cars, fashion, vacations, sports equipment or even makeup choices of others will sink your financial ship as reliably as if you had a gambling habit.
2. Make saving painless
What are your dreams? Whether they include a comfortable retirement, launching a business, putting kids through college, buying a new couch or buying a new home, you’ll need to translate those dreams into savings goals to make them a reality.
Setting concrete goals also helps motivate you, making saving easier. After naming your savings goals, set up automatic withdrawals from your paycheck to savings or a retirement account so you’ll never see the money or miss it.
Keep on increasing the percentage of your paycheck you save. Start by saving at least enough to earn your employer’s maximum matching retirement account contribution. Then, make small but consistent increases to save 15 to 20 percent or more of your earnings. For example, if you’re saving 6 percent of your paycheck now, bump it to 7 percent, and then raise it again later in the year. When you get a bonus or a gift of cash, divert at least a fat chunk of it into savings, too.
3. Live on less than you earn
Well, duh, you say. But it’s not as obvious as it seems. When you spend less than you earn, you can save. If you spend everything you’ve got, you can’t save, and with no savings, it is nearly impossible to get ahead.
The Pew Charitable Trusts used government data recently to look at Americans’ spending versus income. When the recession hit in the first decade of this century, both household income and spending took a dive. Today, spending has returned to earlier levels. But incomes have not.
“By 2014 (the latest numbers), median income had fallen by 13 percent from 2004 levels, while expenditures had increased by nearly 14 percent,” Pew says. That clearly describes an economic problem that’s bigger than our individual households. And yet, we have to work with what we have and those of us who are determined to get ahead simply have to spend less than we earn so we can save.
The solution is simple. But it’s not easy. Stop spending money you don’t have.
4. Cut your housing costs
Decisions about housing are super difficult. Traditionally — before the housing crisis– consumer experts advised keeping your cost of housing at or below 30 percent of household income. Housing was called “unaffordable” over that limit. Today, though, many Americans are spending more and housing costs keep growing.
High housing costs are a budget-buster because housing is typically a household’s biggest expense. The lower your income the worse the housing problem is, since it consumes such a big chunk of your income. In 2014, households in the lower one-third of incomes spend, on average, 40 percent of their incomes on housing, Pew says. Renters in that same income bracket spent nearly half of their income on housing.
You may need a radical lifestyle change to solve this problem. Take a clear-eyed look at your options, even though you may not like them: Move out of your neighborhood, out of town, out of state or in with relatives, or share lodging with others. If you continue spending so much of your income on housing that you can’t save, you are probably limiting your possibilities going forward.
5. Learn to cook
It’s always been cheaper (and healthier) to cook at home than to eat out constantly, but the benefit is growing. As CNN Money reports, relative to the cost of a restaurant meal, groceries are becoming cheaper, despite high prices for beef and eggs. The average price of a restaurant meal grew by 2.7 percent between 2015 and 2016.
Falling back on drive-through meals, even when ordering off the dollar menu, means, says Investopedia, that you can “wind up spending $300-$500 a month on eating out.” You’re spending even more if you are buying breakfast and lunch out, too.
Unsure how get started cooking at home? You’ll find lots of guidance and tips at MoneyTalksNews. A few examples …
- “A Perfect Meal for Health, Wealth and Reluctant Cooks — Chopped Salad”
- “13 Easy Ways to Cut Food Waste and Save Money”
- “25 Ways to Spend Less on Food”
- “6 Ways to Make Cheap Foods Taste Delicious”
6. Get comfortable saying “no” to the kids
If you are giving in to your kids’ every request and demand, you are doing worse than just emptying your bank account and making it impossible to get ahead: You are creating young adults who will have problems with overspending, people who have been deprived of the chance to experience living with reality.
If your children’s demands are driving your spending in a way that, at heart, make you uncomfortable, you may be failing at one of the essential tasks of parenthood. And that’s true of adult children as well as young ones. Turn things around by setting a household budget that sets realistic limits for spending and then, adjusting it as you go, stick to the limits you’ve set. Mother Nature Network has excellent guidance on how to set and enjoy family spending limits.
- “10 Ways to Say No to Your Kids, and Why You Shouldn’t Feel Bad When You Do”
- “Still Supporting Your Adult Kids? 5 Steps to Set Them Free”
7. Know where your money goes
Some people swear by budgeting. Others are happier just tracking their expenses. Do you prefer vanilla or chocolate? Spring or autumn? Mountains or the beach? How you get there is a personal choice, just make sure you can see where your hard-earned money is going, right down to the last nickel. Keeping a careful eye on your spending is critical to getting a grip on overspending.
8. Drive a used car
Buying a new car is like throwing money into a rat hole. Unless you have money to burn, it is one of the worst financial moves possible. New cars lose 60 percent of the original purchase price in the first five years, on average, according to Kelley Blue Book. In its first year alone, the average new car depreciates 36 percent, Kelley says.
Since most of the depreciation happens in the car’s first two years, buying a 2-year-old vehicle is a much better deal than buying new.
Finally, take heart in knowing that one of the greatest rewards of breaking the paycheck-to-paycheck habit is that you’ll feel much less stressed-out. Life settles down when you’ve made those spending decisions in advance, based on values and realistic limits. Having decided what’s important frees you from agonizing over each spending choice.
What strategies have you used to keep your finances afloat? Share with us in comments below or on our Facebook page.