Break Out of the Paycheck to Paycheck LifestyleTrevor Gerszt
Nearly a decade after the financial crisis, American workers are still facing financial difficulties. Rather than getting better, their financial situation is actually deteriorating. Nearly 78% of full-time workers report that they live paycheck to paycheck, up from 75% last year. And 71% of all workers report that they are in debt, up from 68% last year. Thankfully, it’s not impossible to dig yourself out of a paycheck to paycheck existence. Many of the same financial strategies and good habits that are applicable to enhancing your retirement savings can also help you to break out of the hand to mouth cycle.
Assess Your Lifestyle
There’s a great temptation in the United States to keep up with the Joneses. We look at our friends and neighbors and we want to live like them. If our neighbors drive Mercedes and Lexuses, if they take vacations twice a year, if they eat out three or four times a week, we want to be like them. In some cases, it’s because we don’t want to be seen as living frugally, with a reputation for miserliness. In other cases, we think that, well, we make just as much as our neighbors do, so if they can afford these things then we can too.
What we don’t see is just the kind of financial shape our neighbors are in. That brand new Lexus, Mercedes, or BMW probably wasn’t purchased outright. It may be leased, or your neighbor may be making exorbitant car payments on it. There are over $1.1 trillion in outstanding car loans in the United States today, up from $700 billion in 2010. Buying an expensive new car that you don’t really need can just be an entryway into a cycle of debt.
Your neighbor’s Christmas vacation to Aruba or his summer vacation to Europe may not be something he has money to pay for either. American consumers now hold over $1.02 trillion in credit card debt, surpassing financial crisis-era highs. Odds are good that those vacation expenses were put on a credit card to be paid off later, maybe many months later.
How about the new addition your neighbor built to expand his house? Odds are, he can’t afford that either and took out a home equity loan to pay for it. That’s why total household debt in the US has also eclipsed its financial crisis-era highs, and now stands at $12.73 trillion. More and more people are going into debt to finance lifestyles that they can’t afford.
Sweat the Small Stuff
A $5 purchase here, a $12 purchase there, a $17 purchase somewhere else, and pretty soon you’re spending a good amount of money. And all of that money that’s spent is money that can’t be saved or invested. If you cut back that $5 Starbucks coffee you get on your way to work to three times a week, you’ve saved over $500 a year. At an average 8% annual return, just one of those coffees can mean $50 less in savings 30 years from now. Cutting two out every week gets you over $5,000 in savings 30 years from now. Or how about that wine you like to drink with dinner? Cutting back from three $12 bottles a week to one saves you over $1,200 a year, adding $12,000 to your savings 30 years from now.
Those little things add up. That’s why before every purchase you need to ask yourself: “Do I really need this? Can I live without it?” If you don’t need it and can live without it, save yourself some money that could go towards something really useful.
Become More Efficient With Your Time
You may not think about the five minutes you spend here and there on the Internet, checking out your Facebook feed or looking at pictures on Instagram, but that time adds up. A few minutes here, a few minutes there, and pretty soon you’ve wasted an hour or two that you won’t be able to get back. That’s time that could be spent doing something more productive, like getting your finances in order.
Make Savings Automatic
The best way to save is to do so without even realizing that you’re saving. Take advantage of 401(k) opportunities at your workplace, or set up some sort of retirement plan that deducts automatically from your paycheck. If the money from your paycheck goes towards savings before you even see it then saving money isn’t too difficult.
You also should have bank accounts at more than one bank or credit union, assuming you’re not paying annual fees for the privilege. Not only does having two accounts protect you in the event that one bank goes under, you can also set up a direct deposit paycheck to split the money between the two accounts. Set 10, 20, or 30 percent of your paycheck to deposit to one of the accounts and live off the remaining 70, 80, or 90 percent. Don’t touch the money in the other account and you’ll be amazed at how much money you can save up in a year.
Refinance Your Loans
If you have the ability to refinance loans, such as your mortgage, you should take the opportunity to do so. Interest rates remain at historically unprecedented lows and they won’t be getting any lower. They’ll only move upwards from here. Refinancing to a lower interest rate, especially on a longer-term loan such as a mortgage, could save you thousands or even tens of thousands of dollars in the coming years.
Do a Little Work on the Side
More and more people today are working on the side. In some cases, it’s because they’re trying to make ends meet, in other cases it’s because they have a hobby they really enjoy that can make them a little bit of money. If you have the time, talent, or inclination to start up a side gig, give it a shot. You never know, you might just be good enough at your side gig that you’ll eventually be able to turn it into a full-time endeavor.
Build Up Your Emergency Savings
More than 57 million Americans have no emergency savings. They’re just one car accident or medical emergency away from bankruptcy. Most financial experts recommend that you have at least six months of living expenses saved up in order to protect yourself against financial emergencies. That’s where all of the advice above comes in handy. Saving money by getting your finances in order and minimizing extraneous spending can help you to build up enough savings to protect yourself against unforeseen expenses and help break up your paycheck to paycheck struggle.