Monthly Challenge: Get the Most from Your Paycheck

If you are living paycheck to paycheck, you’re not alone — it’s far more common than you think. According to Forbes Reports, 56% of Americans have less than $1,000 in their checking and savings combined.¹

Breaking the cycle of living paycheck to paycheck isn’t just about making more. In fact, 25% of Americans making over $100,000 a year still struggle to make ends meet due to piles of student debt, increased cost of living (especially in places with a strong job market) and long working hours that escalate the frequency of convenience-based dining.²

Increasing your income isn’t always an option, nor is it always a solution. Instead, it’s best to focus on what you can do now to make your paycheck stretch farther than you think possible. Take these steps to stop living paycheck to paycheck and just start living.

The first step to get the most out of your budget is to understand how your take-home pay is calculated.

After you understand the total you should receive every month, it’s time to see how you can adjust your spending habits to stretch your income wisely.

Next, it’s time to sort through your spending habits. Find out where your paycheck is currently going to help identify the areas for improvement. You can go through your bank statements, credit card activity and other expenses manually or take advantage of one of several tools available online:

This part may seem tedious and frustrating at first, but without thoroughly looking into what each transaction truly is, you’ll end up putting a Band-Aid on a wound than needs stiches. Step 3 may lead you to some major realizations about your spending habits. It could also encourage you to falsely justify things you really want but don’t truly need. It is crucial that you’re patient, thorough and above all, honest with yourself and your needs versus wants.

Start by sorting all your regularly occurring expenses into two categories. If you struggle to define the expense, see how a budgeting tracker labels that transaction. If you are struggling to define the difference between need and want, ask yourself if that expense is something you can physically live without. Sometimes, an item can be a want or a need depending on the circumstance. For example, a pair of new shoes in the midst of a shopping spree is a want. A pair of shoes for your work attire is a different case and can be seen as a need. Use your best judgment, or see our table below for examples:

Once you have these things categorized, it’s time to start making cuts. Start with your “wants” and work your way back to your needs. Most frivolous spending happens within the want-based purchases, so this will be the most important area to start budgeting closely. Challenge yourself to spend only 50% of your “want” budget. Here are some important questions to ask yourself to help keep you from making unwanted purchases:

• Just because something is on sale does not mean you have to purchase it. Ask yourself: “Would I have considered purchasing this if it wasn’t on sale?” If you answer is no, don’t buy it.
• If you answered yes or if the item is regular price, ask yourself: “Will I be happy that I made this purchase 6 months from now? A year from now?” If you answer is no, don’t buy it.
• If you answered yes, leave the store. Give yourself 24 – 48 hours to think about it (or maybe even compare prices online for a better deal). If after that time, you are still confident you want it — and have the budget for it — go for it.

Your needs are not immune to cutbacks, but cutbacks from your need box tend to be more limiting. That doesn’t mean impossible! In our next step, we’ll share some cutbacks that are easier than you think for both your needs and wants!

Many people end up living paycheck to paycheck as a result of an emergency expense that forced them out of their means. In a recent Federal Reserve Board survey, 47% of respondents said in a case of a $400 emergency, they would cover the expense by borrowing or selling something.³ In another study, 23% of Americans would turn to a credit card in case of emergency. By building up savings, you can help prevent that cycle from ever starting. There are many different savings plans and options depending on your current financial status. Check out these related blog posts to help you get started:

• Monthly Challenge: Start a Savings Plan
• Guide To Retiring Comfortably: Decade By Decade

¹Holmes, J. (January 12, 2016). More than half of Americans reportedly have less than $1,000 to their name. Retrieved August 17, 2016, from http://www.esquire.com/news-politics/news/a41147/half-of-americans-less-than-1000/

²Kasperkevic, J. (December 25, 2015). $100,000 and up is not enough – even the ‘rich’ live paycheck to paycheck. Retrieved August 18, 2016, from https://www.theguardian.com/business/2015/dec/25/wealthy-americans-living-paycheck-to-paycheck-income-paying-bills

³Gabler, N. (May 2016). The secret shame of middle-class Americans. Retrieved August 18, 2016, from http://www.theatlantic.com/magazine/archive/2016/05/my-secret-shame/476415/

The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does no constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.