Feel like you have no wiggle room in your finances? Here’s how to manage debt and start saving, even when it feels impossible.
Nowadays, a whopping 54% of Americans are living paycheck to paycheck. This means they only take in enough money each month to pay off their debts and expenses, with little to no funds left over to put into savings or investments.
And it’s not just the low-income earners who live this way — plenty of middle- and even high-income earners also have precarious financial situations. In fact, 40% of high earners — people making around $100,000 or more — report living paycheck to paycheck despite their high incomes.
The reason? Well, rising costs of living that are often disproportionate to wages certainly play a factor. But one of the biggest reasons is debt. A CNBC report shows that the average American in 2021 has $90,460 of debt, whether it’s because of school, medical expenses, credit cards or a number of other reasons. That’s a good chunk of change, even for people earning over $100,000 a year.
Yes, Debt Sucks … but What Do You Do About It?
Having debt while you’re living paycheck to paycheck can feel like being stuck between a rock and a hard place. Depending on what type of debt you have and how your interest rates are set up, it may feel like you’re never going to be able to pay it off and start saving up for your future.
And even if you don’t have much (or any) debt, living paycheck to paycheck can still be pretty stressful. Without the ability to save up money, you have to worry more about sudden financial emergencies, such as losing a job or having a surprise medical expense. It can be emotionally draining to constantly worry about something going wrong just because you don’t have a little extra money to take care of it.
Luckily, there are ways to move toward a more secure financial situation — it just takes a little strategy and time. Here are 3 tips on how to stop living paycheck to paycheck and start building some savings.
1. Assess Your Cash Flow and DTI
The first thing you have to do when tackling your finances is figure out exactly how much money is flowing in and out of your bank account.
Take a hard look at your transactions over the past month, and assess how much money is coming in and how much money is going out. Write down all of your expenses (you can create categories to make it easier, like “food,” “pets” or “entertainment”) and how much money is going toward each.
One of the most important aspects of this assessment is determining how much money is going toward your debt. Your debt-to-income ratio (DTI) is a very important metric that banks use when deciding things like whether to give out loans. It can be calculated by:
- Adding up all your monthly debt payments (auto, student loans, credit cards, mortgages, etc.)
- Dividing this by your total gross (before tax) income
- Multiplying the answer by 100 to convert the decimal into a percentage.
If your DTI is under 20%, you’re in the recommended range, and are in a good position to start curbing other expenses.
If your DTI is 30% or over, however, you should mainly focus on paying off your debts as much as possible. Try to arrange your budget so that you can pay off more than your minimum payments.
2. Create a (Realistic) Budget
After you know what’s currently happening with your money, the next step is to make sure you have better strategies moving forward. The No. 1 thing you need to do to accomplish this is create a strong budget you can realistically stick to.
The best way to make a budget is to go in order of how important your expenses are. If you want to start putting money aside to save or pay off debt, you’re going to need to cut expenses (or increase income — we’ll get to that in a moment) somewhere, and you need to recognize what can and can’t be shaved off.
Start by calculating your most basic expenses, which may include:
- Housing: Your rent or mortgage payments.
- Food: Your basic groceries.
- Transportation: Gas, public transportation fees, car payments or other related expenses.
- Utilities: Water, heat, electricity, garbage, wifi, etc.
- Medical Expenses: Insurance, prescriptions or other ongoing costs.
Try to assess if there’s anything you can cut corners on here. Maybe you buy the expensive cheese, take long showers, drive around for a while before you get home, or leave the lights on when you leave the room.
If there’s nothing you can cut out, don’t worry — most people are in the same boat. Assume these expenses absolutely must be paid, and set aside an appropriate amount of funds each month to pay them.
Next, you want to assess your discretionary expenses, or expenses that you don’t really need to survive.
This may include:
- Entertainment: Restaurants, movies, bars and sporting events.
- Miscellaneous Subscriptions: Streaming services, apps, delivery services, and non-tech subscriptions such as magazines.
- Travel: Airfare, hotels and other travel costs.
- Personal Care: Makeup, grooming and beauty products.
- Clothing: Regular clothes, shoes, accessories, jewellery, etc.
- Tech: Cell phone expenses, cable, software, etc.
Depending on your lifestyle, you may deem certain expenses more necessary than others — the latest tech might be important to someone in the tech industry, while good clothing may be important for someone who needs to dress well for their job. And of course, it’s always important to do things that make you happy.
You do, however, need to be honest with yourself and cut out absolutely everything that isn’t necessary to your work, health and happiness. If you usually spend $200 on entertainment, try to shave it down to $100 next month, and then try $50 the month after that.
Even though it may not seem like much, cutting down costs here and there can add up to some major savings. This can especially make a difference if you’re trying to pay off debt faster. Even if this means you have to sacrifice some creature comforts, living below your means may be worth it in the long run to create a better financial future for yourself.
3. Start Looking for Ways To Get Additional Revenue
A common situation for people living paycheck to paycheck is to not really have any expenses they can reduce. Sure, you can theoretically cut a few hundred dollars a month by eating rice and beans and not having cable — but is that really a sustainable way to live?
If you feel you have exhausted all the opportunities you have to save the money you’re already making, it may be time to buckle down and start brainstorming ways to increase your income.
This can be hard and time-consuming at first — after all, no one wants to work beyond their usual 40-hour schedule. But if you’re in a particularly bad financial hole, it may be worth it to work extra hard for a little bit so you have a more rewarding future in the long term.
The most obvious thing you can do to increase your income is to get a higher-paying job. But, if that’s not an immediate option, here are some more ideas:
- Focus on Education: Do some extra training or education in order to level up in your current field. Whether this means doing an online course, getting a certificate, or taking night classes, spend a few months or years collecting more skills so you can move up the ranks.
- Get More Hours at Your Current Job: If you’re working part-time, try asking if there’s a full-time position available or if you can tack on a few more hours to your schedule.
- Get a Side Hustle: Start driving for Uber, doing grocery deliveries, selling homemade or secondhand items online or at a farmer’s market, or freelancing. There are tons of opportunities out there, including an ever-growing amount of work-from-home jobs, so there’s something to fit everyone’s skills and schedule.
Get Financial Help From Professionals
If all of this seems overwhelming or complicated, don’t worry. Sims Resource Group can help guide you through all the nitty gritty details of your budget, especially if you’re stuck on managing your taxes or debt.
