How to stop living paycheck to paycheck as a wage-earner
The focus is to prioritize your savings rate. It’s a crucial solution to avoid being one job away from drowning in debt.
If you’re constantly stressed about meeting your financial obligations constantly or always worried if you’re able to financially survive for the month but heave a sigh of relief when your paycheck comes in, then you’re working poor. You’re just one paycheck away from getting into debt.
According to CNBC, in a survey conducted in early January 2022, it was found that 56% of Americans can’t cover a $1,000 emergency expense with savings! 😮 Instead of having an emergency fund that helps to cover unexpected expenses, many Americans had to go into debt by either asking family and friends for a loan, taking a personal loan from a bank, or charging a credit card.
The same could be said for my home country, Malaysia. A financial literacy survey 2021 conducted by Ringgit Plus found that 51% indicate that they can only survive for less than 3 months if they lose their job! So how can you solve the problem? Here are 6 ways you can do to avoid being a paycheck away from getting into debt.
1. Pay yourself first
What paying yourself first means is that you would need to first prioritize setting aside money for your own use and in this case, build an emergency fund. It must be the first “expense” paid before paying any other commitments or expenses. So when your paycheck comes in, the first deduction from your salary goes to your emergency fund. Then, paying off any other bills or expenses. A good rule of thumb to save for an emergency fund would be to have at least 6 months of expenses.
2. Have an automated budget
To ensure that there are no second thoughts about building up an emergency fund or overspending your salary, an easy solution would be to have an automated budget. It works not by just keying in numbers on a spreadsheet and hoping that you’ll follow it but by placing a standing order for essential commitments like your emergency fund, mortgage, and hire purchase payments. It’ll help to ease up your time commitment and discipline to follow.
3. Pay off any high-interest debt
To avoid getting further into debt is to make sure that you’re already out of debt in the first place. Having an emergency fund while still being drowned in high-interest debt is not sustainable to get out of living from paycheck to paycheck. Why? Because it does not help to increase your savings rate. Debt-reducing strategies like the debt avalanche method, debt snowball method, or debt consolidation loans are effective to reduce any high-interest debt. See here for the know-how!
4. Have an expense tracker
It’s the little expenses that you think won’t break the bank. But if added up, could reduce a significant portion of your savings. For example, if you think that having a $12 meal a day might not make a huge difference to your savings, but if added up for 30 days, it would cost $360 — and it’s only a meal for a day. There are plenty of free apps available to track your expenses and it keeps you mindful of your spending. So, it's important to know where your hard-earned money is being spent.
4. Identify necessities vs luxuries
Once you’re able to list out your expenses, it’s much easier for you to reflect on your approach to spending. Do you spend on unnecessary things or goods that give you short-term satisfaction? Or are you spending on necessary items? It’s important to differentiate between a necessity and a luxury. For example, it’s a luxury to eat out but a necessity to have 3 meals a day, so cooking your own food helps to satisfy your necessity. Most people get caught up in luxuries when their income increases. So, they are still caught in the cycle of living paycheck to paycheck just because they want to “keep up with the Joneses” and not being aware that they are experiencing lifestyle inflation.
5. Learn and solve more problems
While finding ways to decrease your expenses helps to increase your savings rate in some way, a longer-term approach to ensure that you’ll be compensated in the form of income would be to solve more problems. Why? Because by solving more problems, you’re an added value to society. You become more valuable in the marketplace. Corporations would be more than willing to hire individuals that can help to solve a company’s problems that help to increase profits. For example, if you’re an expert in sales, your skills help to increase the company’s revenue which in turn, increases the company’s profits. However, in an ever-evolving environment, it’s also just as important to up-keep your level of skills and expertise so you would remain competitive in the marketplace. So learning plays a crucial role in that.
6. Accumulate passive income assets
Another important aspect that most people do not constantly look out for is to invest in passive income-producing assets. Finding multiple sources of income is a great way to reduce your risk of succumbing to bad debt and financial trouble. In other words, it greatly increases the amount of time you can live without working. Imagine having an asset that provides a passive income that covers 50% of your expenses given that you have 6 months of an emergency fund. What it means is that you’ll be able to cover your expenses for an additional 3 more months without any income! See here to know what passive income assets you can accumulate.
My thoughts
It’s definitely stressful and concerning for most individuals that live paycheck to paycheck. While there might be various reasons why one might be living paycheck to paycheck, the bottom line is that if a person is living paycheck to paycheck, the individual has not placed savings as the first priority. Instead, whatever is earned, is spent for the exact same amount or even more which could spiral down to being deep in debt. However, the silver lining to this is if the individual is able to keep what is earned and spent what is left after saving, then they are on the road to getting out of living paycheck to paycheck and even better, gain financial independence if they choose to continue saving and start to purchase income-producing assets. Hope this helps you as a guide to get out from living paycheck to paycheck and even better on your quest to financial independence!
If you’ve found my sharings to be helpful or insightful, do subscribe to my email newsletter here to know what my financial gameplan is and my progress towards achieving my goals.
