The phrase “living paycheck-to-paycheck” usually has bad connotations. It conjures images of money that’s spent even before it has been earned; of tight budgets and even tighter financial deadlines; and of always being one financial mishap away from living in a van down by the river. While this may be the reality for a majority of the 76 percent of Americans that are currently living paycheck-to-paycheck, it is actually possible to do so and still invest your money to build a solid financial foundation.
To achieve financial success while living paycheck-to-paycheck you need strong budgeting, good debt management, and a solid investment plan.
Good Debt Management
Debt is any money that you would owe a creditor, such as loans, mortgages, and credit cards. No matter how much money you make, if your debts are more than 36 percent of your income they can have a negative affect on your finances; and the greater the percentage of debt, the greater the damage.
The first step to making working paycheck-to-paycheck work is to lower your percentage of debt, or completely eliminate it.
If your debt is between 37 percent and 42 percent of your income, you are still in the manageable stage and, with a little belt-tightening, you should be able to significantly reduce or eliminate some of that debt. At this point you should avoid taking on any new debt, and cut down on the use of your existing credit, while you focus on paying off the existing balance.
If you debt is between 43 percent and 49 percent of your income, you are beyond the manageable stage at this point. You might have several cards that are maxed out, you could be making late payments, and you might even be sacrificing some of your living expenses to make your debt payments. It will be harder for you to significantly reduce or eliminate your debt, but not impossible. However, to really take care of your debt you might need to hire a credit repair or credit counseling service.
If your debt is greater than 50 percent of your income you are in what’s considered dire financial straits. You are probably behind on your payments and at the stage where you are getting frequent credit calls. You might even be in collections with some of your accounts, and you could even be behind on your living expenses as well. At this point you definitely need professional help in getting on top of your debt in the form of credit repair, or even bankruptcy.
Finding a Reliable Professional
There are several agencies and companies that can help you get a handle on your debt, unfortunately not all of these entities are created equal. You should always do research on any company that you are interested in hiring, not only from the consumer end but from the company end as well, because you can tell a lot about a company by the way it treats its employees. For example, a Lexington Law review page shows that a majority of employees rank the company well in terms of work/life balance, compensation, and other important factors. When employees are happy with their jobs that influences how well they do their jobs and how they treat their clients.
Strong Budgeting
Your budget should include all of your living expenses and debts, even the small things. For example, if you spend $10 on a large latte and a Danish from a coffee house every Monday morning, that needs to be accounted for in your budget – not only because you need to know where that money is going, but so that you have an accurate picture of what you need to make it through each week.
Once you have made the first draft of your budget, you should review it and look at places where you can cut expenses. For example, instead of getting that latte every Monday, try cutting back to once a month and saving $30 that you could apply to other things. Or, if you have cable and spend $40 a month on premium channels, consider dropping the premiums and investing $15 a month on a Netflix membership – for a savings of $25 a month.
You can also look into ways of cutting costs on the things you have to spend money on every week, such as earning grocery store loyalty points for discounts on gas, investing in a chest freezer so you can stock up on meats and other perishables when they are on sale, and washing dishes by hand instead of using the dishwasher.
The final draft should reflect a solid plan for living frugally, that will allow you to meet all of your expenses and still have a little left over at the end of the week.
Every few months you should review the budget, especially as you eliminate debts and free up more of your income.
Your final budget should be something that you can live with, if it’s not then you won’t be able to follow it, and that defeats the purpose of having a budget.
A Strong Investment Plan
Once you have gotten your budget and debt under control, you should have more financial wiggle room from one paycheck to the next. Even if it’s a small amount, you should have a strong plan for investing that little extra every week. Whether you use it for stock trading, or deposit it into a retirement plan, or some other method, you need to put the money into a system where it can earn interest or dividends, but where you can’t easily access it. If you can get your hands on it, then you might be more likely to spend it instead of investing.
The goal is to split your entire paycheck between your expenses, debts, and investments so that there is nothing, or very little, left by the time the next check comes, but everything is taken care of.
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