Living Paycheck To Paycheck? Here’s How To Get Out Of The Cycle
Living paycheck to paycheck can feel like you’re running in place. As soon as money comes in, it’s used to fend off bills and to pay for essentials. Your monthly income barely covers your monthly expenses, therefore leaving you with no savings.
The following steps can help you finally realize the benefits of your labor.
Understanding Your Situation
The first important step is to identify the reasons as to why money might be tight right now.
Undertaking a thorough inventory of your finances and of your broader circumstances will reveal many explanations as to why you’re struggling.
For example, you may have a low paying job but reside in an area where the cost of living is high. Would moving to a cheaper neighborhood save enough on rent to justify the upheaval?
Perhaps you’re living beyond your means. This is a predicament that’ll become clear if you properly review your spending habits. Recognizing the problems is key to finding the right solution for you.
Your Relationship With Money
Very few of us have a healthy relationship with money. If excessive spending is one of the primary reasons you’re existing paycheck to paycheck then you must find ways to overcome it.
This starts with an honest assessment of what’s absolutely necessary in your life and what can be considered expendable.
However, improving your financial health requires much more than simply reviewing your bank and credit card statements. Vowing to cut back on lifestyle purchases is merely the initial phase.
A reappraisal of what money means to you is crucial to developing a healthier relationship with your finances. Discovering whether you worry about money too much or too little is paramount to the next step, creating a budget.
Create A Budget
Creating and sticking to a monthly budget has several significant advantages. Overall, its aim is to help you stay on top of your finances and to help keep track of your spending. Other benefits include:
- It ensures that funds are available to meet each bill, which lessens the risk of penalty fees being applied
- It helps you identify your financial trouble spots
- It puts you in control of your finances, enabling you to know exactly what you can afford beyond the essentials. This minimizes the risk of a costly spending spree
- It helps you focus on your financial goals and shows you that savings are possible
Please remember, it’s one thing to jot down a monthly budget, quite another to abide by it.
Option 1: Snowball Method
In essence, the snowball method is the strategy of paying off the smallest debt you owe at the earliest opportunity. This is followed by the second smallest debt and so on until you’re making serious headway to eradicating your dues completely.
The logic behind it involves common sense and a basic understanding of human psychology. Here’s how it works:
- Minimum payments are made on all other debts except for the smallest debt. The smallest debt is what you’ll make the largest payments on. This practice is repeated until all bills are paid off
- Since the most manageable debt is dealt with relatively quickly, it can give you a real sense of achievement thus encouraging you to proceed
- Instead of committing to a vague concept of paying money into a void and not being aware of any difference, actual progress is seen
Option 2: Avalanche Method
The avalanche method is similar in principle to the snowball plan but reaches its objective through a different approach.
Interest rates are gauged from your debts, with the highest identified. This debt is what’s focused on first, therefore receiving accelerated repayment. The rest of your debt is kept at bay through minimum monthly fees.
The advantages to this approach are as follows:
- Mathematically, this method is the logical choice because you’ll pay less interest
- It’s also the quickest way to eradicate your debts, though this is off-set by an intimidating sum paid out straight away. The snowball plan eases you into repayment. This method doesn’t
- Debt that includes high-interest rates are the most problematic. Immediately tackling these can feel empowering
- It helps you focus on the more detrimental debts at first, such as credit cards