Your Four Step Plan Towards Financial Healing – Breaking the Paycheck to Paycheck Syndrome

7 comments

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.
Bookmark and Share

Liked what you read? Then stay connected and get the latest articles via RSS, Email or Facebook

{ 2 comments… read them below or add one }

CZ April 29, 2010 at 12:32 pm

>I have disgreed with it everytime i see it. Of course it is very important to bring your credit card usage under control and to stop accumulating new debt. But, this can be done without cutting up your cards. If you pay off your balances in full each month, having a credit card does nothing but good things for your personal finances.

Reply

Stephan April 19, 2010 at 2:55 pm

Interesting article, and I have seen your first tip on many other forums and blogs. I have disagreed with it every time i see it. Of course it is very important to bring your credit card usage under control and to stop accumulating new debt. But, this can be done without cutting up your cards. If you pay off your balances in full each month, having a credit card does nothing but good things for your personal finances. It increases your credit score, shows future lenders you are responsible, and it saves you some money by keeping your money in a bank account earning interest until the day that your credit card bill is due. Keep this in mind before you take a knife to your credit cards!

Reply

Leave a Comment


9 − = 4

{ 5 trackbacks }

Previous post:

Next post:

Disclaimer: The information contained on Saving to Invest (this site) is for general information purposes only and does not constitute factual or professional financial advice. In accordance with FTC guidelines, we disclose that we may have a financial relationship with some of the merchants/companies mentioned on this website. We do our best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers. Refer to the Privacy Policy and Terms of Use for more information