While a Stellar Income is great, you’ll struggle if you don’t know how to manage it. These five steps will get you out of this paycheck to paycheck life.
Most Americans now live paycheck to paycheck. While this isn’t exactly breaking news, there is another layer that is. Half of Americans earning $100,000 or more a year now live paycheck to paycheck, according to a new report. by LendingClub and PYMNTS.com.
The huge jump in inflation is hitting more Americans, including those who earn the most. The hardest-hit group is millennials. Three out of four millennials — 75% — live paycheck to paycheck. A third of Millennials who live like this and struggle to pay their bills. In contrast, about 56% of baby boomers live paycheck to paycheque.
If you’re one of the millions of Americans who spend their entire salary on bills and debt, you may not know how to get out of this devastating cycle. Here’s how to get out of it.
Step 1: Find out the cause
Before you can find a solution to your problem, you must first discover the problem.
“A good way to start is to uncover the root of your personal financial situation,” says Anuj Nayar, Senior Vice President and Head of Financial Health at LendingClub. “You do this by tracking your spending for as little as two weeks to understand exactly where your money is going, including every time money comes in, cash leaves your hand, or what you buy on credit.”
Self-monitoring is a good first step in finding out what type of consumer you are. This way, you can make the appropriate changes to your spending plan.
Step 2: Set a budget
Once you see where all your money is going, you can set a budget. It may seem daunting to set up, but keep in mind that it is always growing and evolving. So what you put in place today doesn’t necessarily mean it will stay that way forever.
Your budget should include the amount of money you receive each month, whether it’s for day-to-day work, side activities, or regular payments through government programs, such as Social Security. Include all sources of income you have.
Then it should include a line for each monthly expense. This includes regular payments like rent or mortgage, utilities, car payments, and loans. But it also includes food, subscription services, household supplies, personal care, and whatever else you pay for each month. If you are paying for things like child support, alimony, or your child’s schooling, these will also need to be included.
Step 3: Adjust your expenses
Building and tracking your budget will show you where all your money is going and then you can make changes accordingly. For example, if you and your partner work from home, would it make financial sense for you to only use one car? Even if it’s already paid off, you can lower your car insurance payments and use the money from the sale to pay off debt or build savings.
Also think about small changes. For example, can you reduce your monthly subscriptions or how much you dine out? Reducing your expenses and moving your money takes some time and effort. Making these changes isn’t always easy, and in some cases it’s very different from your usual routine. But creating and maintaining new financial habits will only be for the better.
Step 4: Create a debt repayment plan
If debt is eating away at your income, it’s time to find a way to get rid of it as much as possible.
Take some time to list all your debts, including credit cards, loans (car, student, personal) or other unpaid things, like medical bills. Write down how much you owe, the interest rate, the minimum monthly payment and the due dates. Then choose the repayment plan that works best for you. Some popular are:
Avalanche of debt: This is when you first pay off the debt with the highest interest rate. This reduces the total amount of interest you will pay during the repayment of your debt. You’ll start by making the minimum payments on all of your debts, then you’ll allocate any additional money to the debt with the highest interest rate. You will do this until the debt is fully paid, then move on to the next debt with the highest interest rate. Keep doing this until all your debts are paid off.
Debt Snowball: This method focuses on the debt with the lowest amount. You will make minimum payments on all your debts, then pay any additional payments on the debt with the lowest amount. Once this is paid, you will move all of your payments to the debt with the next lowest amount. Continue until all your debts are paid in full.
The debt snowball method is good for those who need small wins to encourage them to keep going. Debt Avalanche is best for those who want to minimize the amount they want to pay in interest and can focus on long-term goals.
Step 5: Start saving for emergencies
Saving and paying off debt go hand in hand, so consider this step like the previous one. You don’t have to finish paying off your debts before you start saving money. They can be done at the same time.
Since your budget keeps growing and changing, add a line to contribute to a savings account. Try to find a high-yield savings account where you’ll earn up to 25 times more than a regular savings account, depending on where you open it.
You don’t have to make huge contributions to your savings; a little goes a long way. Start small with $10 or $20 per paycheck. Try setting small goals, like hitting $100, then $1,000, then a month of spending. Then three. And just like that, you’re out of the paycheck-to-paycheck cycle.
RESPECT THE BUDGET YOU HAVE SET
Whatever budget you choose, sticking to it isn’t an easy task, but it’s a hugely satisfying one. Telling your money where to go each month gives you a sense of control, power, and independence. All good things. Start by tracking your spending for a month or two… And then what? We have five suggestions to help you succeed here!
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