Living paycheck to paycheck is a cycle that is difficult to break. It’s hard to find the motivation to make some changes when you have no idea where to start and without any motivation to change, it just won’t happen.
Given that the average American doesn’t have an emergency fund that would tide them over if an emergency was actually to occur, we put together a step-by-step list to help you get on top of your expenses and debt so that you can start saving and investing.
Each step asks you to make some small changes. It isn’t practical for everyone to implement all of these at once (although it certainly won’t hurt you if you can), so you should focus on making gradual changes over time and look at this as a process and lifestyle shift instead of a quick fix.
With that said, whilst financial freedom certainly won’t happen overnight, you should note some relief fairly quickly.
Step 1: Identify Your Expenses
You’ll need to identify your expenses before you can start to think about cutting down on them. You can track your spending old school style by simply keeping an expenses journal.
These apps typically ask you to insert your income and log all of your expenses. The expenses are usually listed in categories, like food, entertainment, transport, so that you can get some insight into where your money goes.
You can also look into apps like GoodBudget, Wallet or Wally if you want something that’s a little more comprehensive and that will allow you to export the data to Excel (so that you can create helpful charts later on).
You need to include everything – I mean everything – when tracking your expenses. Be brutally honest and don’t start attempting to save money during the ‘expense identification’ stage unless you intend to continue doing so afterwards.
You should include ‘extras’ even if they’re something that you wouldn’t usually buy – like the flowers that you got for your friend as a birthday gift – because even though you wouldn’t usually buy that particular item, there is likely something like that each month that you would otherwise fail to consider.
You should also log into your bank account from time to time to check that you’ve remembered to list all of the tap-and-go payments for your morning coffee and bagel or whatever else, plus your direct debits.
Keep track of your expenses for a month or so to get a complete picture of the money that you are actually spending.
Keeping track for a very short period (a few days to two weeks) is unlikely to provide a clear picture of your habitual spending because it won’t include all of the direct debit subscription expenses.
After you’ve tracked your expenditure, you should create a visual which gives you the full picture of where your money went for the month.
Be sure to compare the expenses that you logged for the month to the figure that actually disappeared from your bank account. If there is any discrepancy, work out where the money went and add it to the list.
Step 2: Challenge Them
Now that you’ve got your list of expenses, you should go through and determine how essential each of the expenses are.
It’s a good idea to have some kind of categorization system here so that you get an overview of your expenses as a whole and can still look into each category to see where you could start to cut down.
Every person is going to have a different idea of what essential expenses are vs what expenses are non-essential. Obviously housing, utilities, phone, food, medication, and transport are the bare bones essential expenses.
You need these things in order to function within society in a way that allows you to make money.
Other essential costs will depend on your job and to a certain extent, your lifestyle (for example, flight attendants might need to have their nails done for their job, for others – this is a non-essential expense).
After you’ve identified these expenses and put them to the side, you need to go through the remaining expenses and consider whether or not it’s money that you need to spend.
First time through, it is going to be difficult. I suggest creating categories like “highly desirable”, “desirable” and “unnecessary” to help you work out where to start saving.
It’s again helpful to have a visual here, the adage ‘out of sight, out of mind’ really is true when it comes to managing your expenses, so it’s best to keep them well and truly ‘in sight’.
Step 3: Stop Spending Money on Unnecessary Stuff
This step is simple: you should stop spending money on anything that you have identified as unnecessary. Immediately.
If you haven’t been to the gym that you’re still paying for in the past few months, cancel it. If you pay for an eBay plus account to save on shipping but you only buy items from the site once every blue moon, cancel it
If you pay for an audiobook subscription but don’t listen to audiobooks, cancel it. Fortunately, there are apps that can help you monitor and cancel unnecessary subscriptions, like TrueBill, Trim, Bobby (IOS only at the moment) and Subscript Me.
At this point, it is probably wise to automate a savings plan that takes the amount of “unnecessary” expenditure from your day-to-day account and places it into a savings account that isn’t linked to your card.
I personally go one step further and put this money into an account with a different bank so that it is more difficult to access. If self-control isn’t your strongest attribute, this is a great idea.
If you’re new to automated savings plans, check out our review of Chime, an online bank account that automatically saves a portion of your income.
You should already see some potential to stop living paycheck to paycheck and start saving, but there is plenty more to be done!
Step 4: Spend Smarter
Cutting down on your expenses is usually simple enough with a few minor lifestyle adjustments, but you can make some huge savings by adjusting your spending habits too.
For example, there is really no reason to have cable anymore: there are legal subscriptions services that provide the channels that you use for a fraction of the price you pay for cable.
Bank fees and administrative fees can be a huge and unnecessary drain on your finances too, as can interest repayments on loans. Whilst these types of expenses might seem difficult to get rid of, I assure you – it is easier than you think.
Refinance Your Debt
You can refinance all kinds of debt nowadays, not only your mortgage but also your student loans, credit cards, car loans and the like.
For credit card debts, there are providers who offer great deals on balance transfers. This means that you’ll pay less interest on the same debt.
Consider the fees on the balance transfer before doing so, however. Generally, the fees associated with the balance transfer for really small debts mean that it isn’t worthwhile refinancing if you could pay off the debt within a few months.
For home loans, the rule of thumb is that if you can save more than half a percent when refinancing, it’s worthwhile. You should always check with a broker or do some thorough research yourself to make sure you’ll actually save money by refinancing.
Pay Down Your Debt
Once you’ve managed to land a better repayment rate, you should pay it down as soon as you can. With interest rates on credit cards as high as they are (usually around 15%), the sooner you can get rid of your debt, the better.
If you’re considering saving money for a rainy day when you have outstanding debts, it’s highly likely that you’d be better off if you decided to pay down the debt instead. Interest rates on investments are typically much lower than the interest rates on credit card debt and the like.
What this means is that if you put money into a savings account, you’ll earn less interest from your investment than you will pay on your debt.
Mathematically, the fastest way to get rid of your debt is to list your debts from largest to smallest in terms of the amount of interest you pay per month.
You should then aggressively pay down the debt with the largest amount of interest until it’s gone (or smaller than another) until your debts are gone.
When I say aggressively pay down one debt, you still need to meet the minimum repayments on the others to avoid incurring fees and to keep your credit rating intact.
Interestingly (or perhaps, predictably), this isn’t particularly motivating for people so, despite it being the most effective method, in theory, it is not the most effective method in practice.
Instead, according to the Washington Post, you should list your debts from largest to smallest in terms of the amount of interest and pay off the smallest debts first.
You are more likely to stay motivated and stick to your debt management plan when you see the smaller balances disappearing than you are if you are reducing your debt in a more effective but more abstract way.
Find Better Prices for Subscription Services
All those expenses coming out of your bank account on a weekly, fortnightly or monthly basis can probably be much cheaper than they are.
Shop around for your mobile phone contract, your insurances, your gym membership, your choice in TV subscription, your music provider, your internet provider, your utilities providers … you get the picture.
Most of us are paying way too much for subscriptions and providers rely on our laziness to continue to grow their profits.
Providers are usually willing to offer some kind of sign up bonus, so take advantage of the free months offered by Apple Music and Spotify (or just use their free programs if you can tolerate the ads) or visit a gym for a 14 day trial you found on Groupon and sign up after negotiating some free months or a lower rate.
Pro tip: Pretend You Have Less Money Than You Do
Pretending that you have less money than you do is also a really great trick you can play on yourself. When I was at University, I lived on my tiny student income and was none-the-wiser about anything that I was missing out on.
I quickly adapted to my full-time wage and started spending more than ever when I started my first full-time role after graduation. I soon started to wonder how I ever lived as I did when I was a student.
After a few months, I became sick of not saving anything so I automated my savings so that the money was gone from my account as soon as I got paid. It was like I never received the money at all!
With that mindset, it was easy to make the decision to cook at home or forego the expensive shirt for a second-hand item of similar quality (but with much more charm).
Step 5: Reconsider The Expenses You Listed As “Desirable”
This is the point at which you need to start getting creative with your expenses. Consider which expenses you can get rid of entirely, which ones you can minimize and which ones you’d really prefer to keep.
If you’ve got your visual handy, have a look at the expenses which are really eating into your income and start there.
The methods that I suggest below are just that, suggestions. Some may require a change in lifestyle that you couldn’t live with: if this is the case, don’t do it!
Also, don’t feel restricted by my list: if you think of another way to save money then you should go for it!
Ways to Get Rid of Certain Expenses:
Ridding yourself of transport expenses is close to impossible if you need to commute to work. If you own a car then you’ll need to sell it in order to get rid of the expense altogether.
Understandably this isn’t an attractive option for most of us, but for those that can – you should do so.
They really drain your income, so if you already take the bus to work and only use cars on occasion then you should definitely consider a car-sharing program. You can use a local car via a peer-to-peer sharing arrangement.
This isn’t a long-term solution, but there are a lot of companies that provide customers with a free meal or snack if you sign up for their service.
Check out our review, but bear in mind that these subscription services are usually more expensive than if you just go to the supermarket yourself and buy the produce.
Drink water from the tap instead of purchasing soda or other beverages.
I’m a big fan of swapping up my entertainment options. Life without any form of entertainment is a pretty dull affair. But there are heaps of free alternatives! In summer, consider going to the park or the beach instead of the movies.
Go window shopping instead of actual shopping. Meet your friends at home instead of at a cafe or bar. Watch the game on a big screen somewhere or at home with a bunch of friends instead of buying tickets.
There are free alternatives that are just as fun as the real deal.
Ways to Reduce Certain Expenses:
The easiest way to reduce your transport expenses is to use forms of transport that aren’t cars, buses or trains.
If you’re within a reasonable distance of your workplace, get a second-hand bike, rollerblades, a scooter or some trainers and get there using the energy that you create.
Public transport is likely to be the second cheapest option.
Have a look at your local public transport offerings and see if you can either save money using public transport or use a hybrid public transport/ self-transport plan to save further (if you live just outside of a cheaper zone).
These platforms allow you to offer to drive someone somewhere or get a ride from someone else and share the cost of the trip with them. You can save even more splitting a car ride whilst using Car-2-Go.
If nothing exists in your area, send an email around your office or consider putting up a sign on the local noticeboard to see if anyone else is interested. It’s good for the environment and for your wallet!
You need to eat, so having zero expenditure on food isn’t possible long term. But you can save quite a lot of money by simply making your meals at home and bringing them with you.
Odds are that you can feed yourself for the week with the money that you would have otherwise spent buying your lunch at work.
You need to make sure that the food you’re buying doesn’t go to waste – otherwise, you’re just throwing money away.
So be sure to do some meal planning, instead of just buying whatever you feel like when getting to the store. Check out our articles about how to eat healthily for cheap and how to save money at the grocery store.
Instead of drinking at a bar, buy bottles of spirits or some beer and drink at a friend’s place or in a park (if it’s legal to do so).
Whilst it’s best to avoid sodas and the like for your health, if you can’t give it up then consider finding a second-hand carbonator and drinking carbonated water with lemon or lime.
If you feel like doing something special for dinner, or if you’d usually meet your friends for a meal somewhere, organise a dinner at someone’s house instead and all chip in for the costs.
Alternatively, you could always have a picnic or BBQ in a park (weather permitting).
Instead of going to the movies and buying full price tickets, arrange a movie night at someone’s house and use their Netflix account or split the costs of renting something via iTunes Movie Rentals, Google Play or the like.
Or find cheap tickets for the cinema online if you really need to get out of the house.
Pro tip: Challenge yourself and do “free days”
I often do this whilst traveling to save money, but it works when I’m saving at home as well.
Make sure you have food and your commute to work sorted in advance, but you should allocate days of the week where you are not allowed to spend any money. You get bonus points for having a social life on these days!
Check out our article about the Japanese concept of ‘Kaizen‘ which promotes gradual and continuous lifestyle changes and improvements for more ideas like these.
Step 6: Earn More Money
This site has an abundance of ways to make additional money, but I’ll give you an overview of your options with links to more comprehensive and relevant articles:
Get a New Job
If you’ve been in your role for a while, it might be worth having a look around to see if you’re ‘worth more’ than what you’re currently being paid.
If you don’t particularly want to move, discuss your pay with your manager and bring evidence that there are other jobs that you are qualified for with higher salaries in your area.
Do Some Extra Work in Your Spare Time
If you’re able to do some additional skilled work, like consulting, repairs, coaching, teaching or freelancing, during your off-time then there is usually potential for you to make some extra cash online. If not, try to find something around your neighborhood.
Sell Some of Your Stuff
One man’s trash is another man’s treasure and all. Selling your stuff online helps you declutter and gives you a bit of a cash injection, so it’s a win-win.
Gumtree, eBay and Craig’s List are all popular resale sites. You can also run a quick Google search to find a niche app selling whatever it is you’re looking to sell. Check out Carousell and ThredUP for clothes and Gazelle for electronics.
There are also options if you just want to make some pocket change in your spare time:
You can also check out our article detailing 17 Ways to make $50 Fast.
After you’ve broken the cycle of living paycheck to paycheck, it’s a good idea to look to the future. You’re almost guaranteed to go back to living paycheck to paycheck if you don’t start some kind of savings and investment plan.
You want to have some cash stashed away somewhere for unplanned expenses or spontaneous purchases. Consider the fees carefully when opening a savings account.
You don’t want your hard earned savings to be promptly taken back by the bank, especially since there is really no need to pay most bank fees in the current competitive environment. Check out our article about saving on bank fees.
It’s a good idea to have some savings behind you before you look to invest in anything. Your investments aren’t liquid assets, which means that you can’t quickly access the cash that you have put into them.
Once you’ve managed to save enough cash to cope with unexpected expenses, it’s a great idea to look at investing some money.
The return on investments (assuming they work out) is typically much higher than what you would receive in interest from a savings account.
You can check out these 5 Apps That Help You Invest if you’re looking to get started with some small or simple investments.
We hope you’ve enjoyed this article on how to stop living paycheck to paycheck. See any more ideas that should be added to this list? Let us know in the comments below. Thanks for reading and happy frugaling!