Guest post by Lyle Solomon, Principal Attorney at Oak View Law Group in California.
So, what does it really mean to live paycheck to paycheck?
Living paycheck to paycheck is an expression used to define people who use most of their income towards their expenses. If you live paycheck to paycheck, little to no part of your income goes towards savings. According to this survey, 78% of the working class live paycheck to paycheck.
Why is it so common even with the upper-middle-class population?
According to this report by CareerBuilder, one in ten workers making $100,000 or more are still living paycheck to paycheck. So, a high income does not seem to mean freedom from financial worries.
If you are struggling to make ends meet, there is a risk of falling into debt. Rising debt can make your situation worse by adding your monthly expenses. Nearly 18% of people, who earn $100,000 or more, struggle to keep up with their bills, groceries, mortgage payments.
The inflation of household debt and rising education costs make the living costs higher and higher. This high cost of living is disabling people from saving up for an emergency fund.
How can it be a problem in the long term?
Living paycheck to paycheck can put you at risk of a financial crisis if you lose your job, face a medical emergency, or have an accident. Emergency savings can help people deal with things like this. Even if their income stops or is spent somewhere else, they can still have enough money to survive for at least a couple of months.
It is stressful to live when you have to struggle to make ends meet while you wait for your next paycheck. Individuals living like this are at a greater risk of falling into debt, specifically credit card debt.
If you face sudden unemployment, you are still obligated to pay these debts off, forcing you towards bankruptcy. You may end up overusing your credit cards and not paying your bills on time if you live paycheck to paycheck. It can also hurt your credit score.
What can you do to avoid it?
Plan a budget and downsize
You may notice that you have a little more wiggle room in your budget than you thought. Setting goals on your expenses can help you keep track of where you might be overspending. Cutting out unnecessary spending is a great way to downsize your expenses. Look for better insurance deals to save on car and property insurance. Allot any bonuses to your emergency fund.
Work towards increasing your income
You can get a part-time job for extra money if your current job situation allows it. You can then use this money to pay off your debts, grow your savings, or invest it for better returns in the future.
If you are skilled at something, even if it’s a hobby, try to monetize that skill. Freelance jobs are also quite easy to find online; you can work as a content writer, programmer, teacher, etc. Another option would be to improve your qualifications and apply for a promotion at your current job.
Work on reducing your debt
Planning a realistic budget and downsizing your expenses will also help you in paying off your existing debts. Adding more debt will only worsen your situation; so, avoid unnecessary purchases, pay your bills in full and on time. Avoiding late fees and high-interest rates will help you pay off your debts quicker. Cut down the number of credit cards, use low-interest credit cards, so that you can manage them easily.
You can consider settling your debts if you can’t pay them in full. If required, you can get professional help in the credit card settlement process to repay debts with ease settling your credit card debt will help you:
- repay your debt through single monthly payments
- reduce the overall debt amount
- negate late fees
Once you have paid off your credit cards, use debit cards or cash to pay for your expenses. However, using credit cards responsibly may help you increase your credit score.
Focus on saving more
After you’ve created your budget, make sure to add a category for savings. Every month, make an effort to save at least 15 to 20 percent of your gross income. You may not be able to save 20% of your income in the first few months, but you can gradually raise your savings.
Making your savings automatic will ensure that a portion of your earnings is set aside for you each time you receive a paycheck. Almost all banks have the option to automatically transfer a chosen amount from your checking to your savings accounts every month.
If you lack a financial cushion of at least $500, set a short-term goal of, say, saving $500 in three months. You should also set long-term saving goals, like for your retirement, your children’s college fund, or perhaps for a down payment on a home.
The bottom line
If you are tired of living paycheck to paycheck every month, then this is your plan of action to break the cycle once and for all. Keep a close eye on your expenses and cut down on certain luxuries. An extra source of income might be the helping hand that pulls you out of this cycle. The only thing that can pull you down further is accumulating more debt or not paying off the existing ones fast. A credit card settlement process can help you get rid of debts by paying less than what you owe. Last but not least, focus on growing your savings to have a financial cushion to rely on during emergencies.
To learn more about TrueConnect’s Financial Wellness Platform, with access to financial advisors, emergency savings plans and loan options, click here.
About The author: Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a Principal Attorney.