A 2017 study by CareerBuilder found that 78 percent of full time workers in the U.S. live paycheck to paycheck–that is, they spend all of the money they make each paycheck, or sometimes even more. Those living paycheck to paycheck have little or no savings to help them if they have an unexpected expense, and may have to borrow money or use a credit card to handle an emergency.
The Risks of Living Paycheck to Paycheck
Living without savings and barely being able to pay your bills has several risks. First, you may get into debt, or deeper into debt, if you have an unexpected expense. Debt payments that grow too large will make it harder to pay your regular bills, and debt payments like credit cards or high interest loans can take a long time to pay off when you can barely even pay the minimum payment.
Another risk of living paycheck to paycheck is that a major financial upheaval like a health crisis or unemployment will put you and your household into severe financial crisis. When the paycheck that you rely so heavily on stops coming, you will have nothing to fall back on, and could end up losing your home or severely damaging your credit if you are unable to keep paying.
Finally, even if you don’t have unexpected expenses or a financial crisis, living paycheck to paycheck risks your future. Years down the road, you may have children that you want to send to college, or you may want to retire someday. If you don’t save any money for these eventualities, you may not be able to give your kids a chance at a bright future or have the future you want as you reach retirement age.
How to Stop Living Paycheck to Paycheck
In order to stop the cycle of working and living paycheck to paycheck and become more financially stable, you need to find a way to build an emergency fund. It may take some work and sacrifice, but you will be grateful when you have resources to handle financial setbacks without going into debt or losing important assets like a car or house. There are several ways to go about building an emergency fund.
Method #1: Cut Your Expenses
The easiest way to build an emergency fund is to adjust your spending so that you will be able to set aside money each paycheck to save. You may think your spending is as low as it can go, but there are usually ways to cut expenses enough to put at least a small amount of money away each paycheck and even a few dollars saved on a regular basis can build into considerable savings over time.
Everyone’s budget is different, but some common ways to cut expenses include getting a cheaper cell phone or cable television plan, bringing your lunch to work instead of eating out, and cutting back on expensive food ingredients like meat or specialty food and eating more simply for a while. Asking yourself if you need an item or if you just want it is a good rule of thumb when you are trying to cut expenses.
Method #2: Increase Your Income
If cutting your expenses doesn’t give you enough money to save or if you feel that cutting expenses isn’t an option, you can also fund your emergency fund by increasing your income. Getting a temporary second job with part-time hours can provide the necessary income to save for your emergency fund.
There are also many ways to bring in a few extra bucks from home on your computers, such as joining a reward program like Swagbucks or Ebates that will give you points toward gift cards or cash back on online purchases. Many people earn around $25 a month on each of these programs with minimal effort, which can then be used to buy needed items and free up cash that you can save.
Method #3: Paying Down Debt
A major reason that people stay in the paycheck to paycheck cycle is that they have too much debt. Most people have multiple credit cards, and the minimum payments on those cards may be adding up to hundreds of dollars every month that could be saved or spent on current needs.
Paying down credit card balances is the only way to free up that money, but finding extra money to do so can seem nearly impossible. In many cases, you may be able to consolidate credit card balances into a loan with a lower interest rate and lower monthly payments, allowing you to put the difference into your emergency fund while paying off your debt faster.
Beware of consolidation loans that say they are going to settle your debt for a fraction of the balance you owe–some of these companies have been scams that leave you deeper in debt, and even if they do what they promise, it will drastically lower your credit score as creditors report your debt as “settled” rather than “paid as agreed.”
Method #4: Banking Raises and Bonuses
This method should be used along with one or more of the others listed here. When you get a raise at your job or a yearly bonus, saving that additional income can help your emergency fund grow faster and get you in the habit of not expanding your lifestyle as your income increases. Another source of extra income most people don’t consider saving is their annual tax refund, which can sometimes be several thousand dollars.
How Big Should Your Emergency Fund Be?
Experts differ on the size of the emergency fund, but the general rule of thumb is that you should have consolidated credit card balances into a loan saved, which will be enough for just about any major unexpected expense and will also cover short periods of being unable to work due to a health condition or being unemployed. Keep in mind that some of your expenses will change if you are not working; you should calculate the amount you need based on your likely expenses while not working or a bare-bones budget rather than what you spend now.
For most people who don’t have any savings, the thought of saving three to six months expenses is likely to be overwhelming, but really, any amount you are able to save is an improvement over having no savings at all. Even having $1,000 saved will cover many unexpected expenses such as a car insurance deductible in case of an accident or a major appliance breaking unexpectedly.
While it may take a long time to build an emergency fund, and you may need to rebuild it several times if unexpected expenses or job loss does occur, being prepared for financial emergencies and setbacks should give you more peace of mind and reduce the stress and worry that so many people feel about their finances.
Having an emergency fund is part of being financially responsible, and it should be a priority for those who want to stop living paycheck to paycheck and find a better way to manage their finances.
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