In the current financial climate, many of us are under pressure to pay the bills, buy basic household items and meet our day to day expenses. Finding spare cash to pay off loans, save for your kids college expenses and to build up a decent retirement nest-egg seems like an impossible dream. Even having any savings at the end of the month after all the bills feels like a bonus.Efforts to save for the future or even for an emergency fund get put on hold simply because there is not enough income coming in to meet our day-to-day expenses. Figures show that only 30% of Americans have settled down to a system where they do not live from paycheck to paycheck. The other 70% of Americans are one paycheck away from monetary tragedy. You can however break out of the paycheck-to-paycheck routine, pay off your loans and actually start saving money.
The cure to break the vicious spiral of the paycheck to paycheck though is easier than you may think, but it requires persistence. Start with this four-step plan to get back on the right path (I’ve also included a couple of recommended personal finance books that provide much more detail and advice on each of these areas)
1. Assess what is wrong. You’ll never get rid of the paycheck dilemma if loans claim the majority of what you earn sooner than it reaches the bank. Sum up your good debt (like home and educational loans) and measure it up against your bad debt (credit cards and car loans). Focusing on paying off just the bad debt with the high interest rates first, even if that means adding your other “less-worse” debt. Also, it goes without saying not to take on more debt while clearing older debt. Cut up your credit and store cards and live on cash. When your access to debt is cut-off your ability to over spend is also curtailed.
2. Diagnose and attack the source. Even before you start out to reclaim your funds for yourself and your family, you have to find solutions to your debt troubles. There are plenty of solutions and debt reduction plans on offer, but the ones that work will take time and things may get worse before they get better. First, formulate a plan to pay off all the high interest debt as quickly and practically as possible with savings you find from cutting down on all your unnecessary expenses. Just writing down what your debts are and what you can do to reduce it is a good first step in attacking a problem that can seem much larger than it really is. Understanding your debt and income – budgeting – provides real insights into what your household’s wasteful spending habits. Cutting back and attacking your debt will require financial sacrifices for you and your family, but the long term results will be well worth it.
3. Take some precautionary measures. Even if you get ready for the main expenses you can foresee, there will be many that you by no means see coming. To end these surprises from turning you back into a paycheck dependant individual, save a little bit of money each month in a crisis or emergency fund. This way you’ll have a considerable stash that will provide cushion for your unforeseen car repairs, appliance breakdowns, and emergency travel. Best of all you will not need to use your credit card (bad debt) to fund these unforeseen expenses. Also put your crisis or emergency funds in a high interest savings account so that it earns a better than average return, yet is easily accessible when you need the money.
4. Calm down. With your loans paid off, your main expenses predicted, and your unpredicted expenses sheltered, you will start to feel more relaxed and calm. You might even feel content when you write a check with no worries about it bouncing due to insufficient funds. Chances are that you will be excited when your savings account has a positive balance at month-end and that spending money and paying bills on time is not tied to receipt of your paycheck. You’re cured! Trust me, from personal experience this is a great feeling. While it is definitely worth rewarding yourself to have met your debt reduction goals, it is important to keep up your good personal finance habits, or else you will be back to where you started.
Once you’ve gotten past the above steps (over time), you are well on your way to breaking the paycheck-to-paycheck syndrome. But getting past these first stages is vital and patience and persistence are key. Once you have got your finances in control the next step is to move up the financial freedom ladder through further educating yourself on the personal finance world, investing in equities and real estate and building multiple sources of income.