What happens when bills are more than income?There's nothing scarier than getting down to those last few dollars but still being a few days or weeks away from payday! Do you have less than $1,000 in the bank and are basically one really bad day away from big financial trouble? If you're like most people, you are. If you're even more like most folks, you have at least $6,000 in credit card debt and most likely you started late and aren't saving enough for retirement; the true living paycheck to paycheck definition. Living paycheck to paycheck, by definition, means that when your check comes in, you're already out of money from the past check; nothing saved, nothing set aside for emergencies and nothing saved for the long term. Then that new check comes in and it's spent in no time flat too. Repeat. When our bills exceed our income, a few things start to happen:
- We tend to start using credit cards just to live off of
- Then we start to pay bills late (or not at all)
- Stress builds up (especially between couples)
- 1 big unexpected expense (car accident, medical issues, new roof or HVAC system for our house) can often push us towards bankruptcy
How do I stop living paycheck to paycheck?I have been in your shoes. 9 years ago, my wife and I owed more than $60,000 and were living in a house we couldn't really afford. When the cash would run out about halfway through the month, we'd just grab the credit cards and keep going. It wasn't sustainable. Don't be like me. I want to spur you into action and my hope is that by reading this post you'll begin to put more thought, but more importantly ACTION into your financial planning. We may looking for stop paycheck to paycheck tips now, but that's not where we want to be in 3, 5 or especially 10 years down the road. So check out my stop living paycheck to paycheck tips. I'd love to hear back about your progress and answer any questions along the way. You don't have to be a CPA or a CFO or even a stock broker to do some decent long and short-term financial planning. In fact, "financial planning" is probably too fancy a word for what I'm talking about. I just want you to be intentional and aware of both where your hard earned dollars are going each month and what are some strategies you could easily and quickly implement to take that to the next level. If you struggle living paycheck to paycheck and are looking for some simple tips to maximize your hard earned dollars, I highly recommend you check out my post Bigger Paychecks. After all, one of the best stop living paycheck to paycheck tips is to maximize the income we earn! Just click the link to read it on my site.
How do you break the cycle of living paycheck to paycheck?Mostly, we just need a plan. When we get intentional with our money and start thinking and planning rather than purchasing on impulse, we start to spend less. We evaluate the choices and choose to not buy everything we might have. This is especially true for couples who make decisions together. Often in a marriage or relationship, 1 person is more the spender and 1 more the saver. So they work to keep each other in check. In order to stop living paycheck to paycheck we first need to:
- Identify the problem
- Figure out how we got there
- Figure out the steps needed to solve the problem
- Identify the habits or circumstances we need to change to not repeat the problem
Why are you broke?
- You Don't Have a Roadmap - You can't get anywhere if you don't know the way, and just like a map or GPS system tells you where to go when driving, a monthly household budget is your way of telling your money where to go each month. Without a budget, you just spend until it's gone and the ride out the days until the next paycheck and hope nothing bad happens in the interim.
- You Spend More than You Make - Unless you're in Congress this just doesn't work. You'll never get ahead or even stay afloat if you are outspending your income. So getting your spending under control is one of my top stop living paycheck to paycheck tips.
- You Have an Income Problem - It could be that you budget each month, have your priorities straight and your spending is in line but you still can't catch your breath. In those cases, it may be worth looking at your income and career path and especially looking at the long term. According to the Department of Numbers, the median household income in the US is currently just under $58,000. Of course, if you live in California or New York, the median there is probably higher, but if you make a lot less than $58,000 then it's time to examine career choices.
How can a budget help individuals and families?A budget is simply a document, spreadsheet or even a piece of paper that you and your spouse write out and agree to before the month begins. You note all the projected income at the top (ie: your paychecks) and all the projected spending below that. You know what your expenses are:
- Rent or Mortgage
- Electric, gas, and water
- Gas for your cars
- Internet & Cable TV
- Cell phone bills
- Insurance (life, auto and maybe renters)
- 401k or retirement
- Credit cards or bank loans
- Car loans
How much should you save from each paycheck?Everyone's monthly expenses and income are a little different. That being said the infographic below is "generally" what I recommend in terms of how to divide up your paycheck. Obviously, some slight variations will work just fine. In my experience though, if you have any significant differences in your budget, you may have a hard time NOT living paycheck to paycheck.
What is the 50/30/20 rule?Essentially this is a style of budgeting that says you spend 50% of your income on needs, 30% on wants and 20% on savings. I personally find that system too simplistic but if it gets you budgeting than that's better than not starting! My biggest issue is that in certain circumstances (such as low income or heavy debt) I don't think you should be focused on savings at all. And 30% of your income going towards so-called wants is probably too high until you're out of debt and living more within your means.
How do you not run out of money?First, we need to trim our household budget. I recommend putting your monthly expenses in order from most to least important. They are all important. It's also important from an integrity standpoint that we repay our debts. But when times are tight, some payments may get delayed or put on the back burner so it's important to prioritize those! But one of the best stop living paycheck to paycheck tips is to prioritize your bills and expenses.
ABSOLUTE MUSTS TO PAY
- Rent or Mortgage - Your problems get a whole lot worse if you have an eviction or foreclosure to deal with
- Utilities - No lights or water is bad for everyone
- Food - You and your kids have to eat. You don't have to eat fancy or eat out, but don't let your kids go without
- Gas for cars - You can't get to work or look for work without reliable transportation so keep at least 1 car gassed and in good working order
THINGS WHICH COULD GET CUT OR DELAYED
- Internet- You can probably make due with your smartphone and/or a computer at work
- Credit Card payments - Make the bare minimum payments until your budget gets in the black. Even if you can't afford their stated minimum payment, send them something each month ($25) and they can't report you as unpaid or paid late. In dire straights though, these guys would be bottom rung on the ladder.
THINGS YOU SHOULD CUT
- Cable TV - Get the top-rated digital antenna from Amazon for under 30 bucks, or get a Roku stick and stream Amazon Prime, Netflix, Hulu, and other similar channels. Don't have Amazon Prime? It's got tons of channels, movies, and TV shows.Try Amazon Prime free for 30 days! You'll also get their famous free 2-day shipping on all qualified purchases.
- Eating Out - Eating at home and cooking from scratch is just cheaper (and often healthier). Until the budget, income, and spending is under control, no eating out
- Fancy Cars - If the total value on your cars exceeds half your annual gross household income you simply have too much invested in cars and need to sell one (or both). For example, a couple making $40,000/year should not own more than $20,000 total in vehicles combined. Do you still have car payments or maybe are underwater on your car's value? A low-interest loan from your local credit union is preferable to a $400/month car payment when you can't keep the lights on.
43 Super-Frugal Tips for Cutting Down on Household Expenseshttps://t.co/GZuuQ8SksM— Middle Class Dad (@middleclassdad1) May 4, 2018
Do you need to find a new career path?As I mentioned above, if your household gross income is well below $58,000/year, you may want to look at your or your spouse's career track and do some long-term planning. Now there could be reasons it's low and those could be reasons to justify it. Reasons like:
- You and your spouse decided one of you would stay home and raise the kids - A stay at home Mom or Dad is a great thing for your kids and a noble cause and if you can make it work budget-wise; go for it!
- One of you is going back to school to earn a degree that will significantly increase their earning potential - Any investment now that pays off significantly later is a good reason to pinch pennies and ride out the storm. Just make sure you're on a balanced budget and that the long-term earning potential is really there.
If you do need to make an income or career overhaul we need to consider 2 things:1. What can you do NOW to boost income?
- Delivery pizzas at night = $1,000/month
- Mow/rake lawns on the weekend
- Sell stuff on eBay/Craigslist
- Finish a degree or achieve a certification?
- Move to a more competitive city?
- Work more hours or find a new employer?
- Change fields?
How to get out of debt and get your finances back on trackSo we know the issues, we're working on solutions, but if we don't address the fundamental behaviors that created the problems, there's a VERY good chance we'll get back in the same situation down the road. In order to get out of debt and start applying these stop living paycheck to paycheck tips, we have to change our spending habits. We have to set goals. More importantly, though, we have to find ways of sticking to those goals. If you struggle with goal setting and (more importantly) sticking to your goals, check out one of my most popular posts about How to Keep Your Goals. While it's geared towards New Year's Resolutions, it can apply to any goal; any time! Without knowing the specifics of anyone else's situation, I can tell you what habits I needed to change when I was in this boat:
- I needed to live on a written budget each month (that my wife and I agreed to and worked on before the month began)
- We pay cash for things like food, groceries, gas and spending money instead of using a debit card; when we're out, we're out!
- We cut out unnecessary expenses like cable and cut back lifestyle in general (hello Taco Cabana, goodbye 5-star restaurants!)
- We knew we needed to live on less than we made, (so that meant getting out of debt, cutting up the credit cards and not looking back).
Should I stop contributing to a 401k if I'm broke?I mentioned above things like rainy day emergency funds, retirement and saving for kid's college but if you're currently struggling with running out of money each month, I would stop contributing to them temporarily. In fact, if you are contributing to a 401k or other retirement plan, it's my belief that you should only be contributing to those ONCE you are out of debt and not barely able to make ends meet. So when I was in your shoes, I temporarily stopped contributing to those. Between a solid financial plan, cutting expenses and possibly boosting income, you can stop living paycheck to paycheck. But you're not there yet and a nice sized 401k won't help you if you're facing foreclosure or bankruptcy. And while you could cash it out, between the likely 25% tax rate and 10% penalty, that's like borrowing money at 35% interest AND THAT'S JUST CRAZY! You WILL get there (I know because we did it); you just need to be focused and intentional with your time, money and actions. You'll need to curb impulses and not worry about how nice your neighbor's car is; focus on your family's future!
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11 Tips on How to Stop Running Out of Money Every Month
1. Identify the issue. Most likely it's one of these:
- Spending habits
- Low income
- Lack of a budget
- 2 spouses/partners not being in sync