Every month you receive a paycheck and every month that paycheck is gone before you know it. You have not managed to put anything toward savings, and it takes all you can earn just to keep from sliding further into debt. How do you avoid a debt spiral and stop living paycheck-to-paycheck?
It’s easy. Earn more, spend less, or both.
We do not mean to be flippant, but the only true way to savings and getting out of a paycheck-to-paycheck living situation is to control your spending. Even if your paycheck increases, without control of your spending habits, you are just going to spend the excess and be no better off than you were.
Here are some suggested steps to help you initiate a savings program and achieve fiscal freedom.
- Change Your Mindset – You have to get past this first step for any of the following steps to work. Make savings a priority. Otherwise, there will always be a reason to spend your money and something on which to spend it.
- Track Expenses – Do you know where all your money goes? You would probably be shocked at the answer.
Either use the old school method of writing down every expense in a notebook, or find an app to do the same thing on your smartphone. Include all the seemingly trivial items like vending machine candy bars, subway fares, and random sodas or cups of coffee. Do not forget to include any automatic payments that you have set up through your bank account.
At the end of the month, total and categorize the expenses to find out where the majority of your money is going.
- Prioritize Your Spending – Start by isolating the necessary spending, such as rent, from your other purchases (“needs” vs. “wants”). How many of your larger sources of spending fall into the wants category?
Take a closer look at your needs category and see if some of them are really wants. For example, do you really “need” to eat out once a week? Move anything over that is not really a need, and then prioritize again within your wants category. This will give you an idea of which spending to cut. "The critical thing is that you know exactly how much it costs you to live and work normally every single month at a minimum," advises millennial money expert Stefanie O'Connell. "Plus, put money towards your top two or three financial goals whatever they are. And then have that number as a measure of viability for your financial life."
- Set a Realistic Budget – Apportion your income toward all your needs first and then set aside a certain amount for savings. Even if it is $100 or just $20, it is a good start toward the savings mindset. Use another portion to pay extra against any high-interest debt like credit card balances, then take whatever money is left and decide how to divide it among your wants.
It is important that your budget be realistic. If you have nothing left for any wants or if your savings goals are unattainable, you probably will not stick with the program.
- Reduce Credit – A long-term key to controlling spending is to slow credit card use. Try not to put any more on your credit card than you can pay every month, and pay your balances promptly. However, do not cancel the account — that will hurt your credit rating.
- Look for Savings Opportunities – Consider coupons and restaurant offers that you may have ignored in the past. Buy non-perishables in bulk. Sign up for loyalty discount programs. Look around your home for potential areas of energy waste. Every little thing contributes to the overall mindset of savings, even if the savings are small. However, keep savings in perspective — do not buy things that you do not need just because they are on sale.
- Look for Extra Income – Consider part-time jobs, or selling unwanted items as a way to cut down your debts and the corresponding interest. However, it is important you take care of the spending part of the equation first. Otherwise…poof, your savings are gone in an instant. (That is why this tip is last in the list.)
These are not easy steps, but they are necessary ones in order to succeed. However, as we mentioned, the first step is the most important. Are you ready to make some sacrifices for long-term gain? If so, congratulations! If not, go ahead, whip out that credit card, and head off to the mall. However, the next time you try to control your spending, we guarantee it is going to be more difficult.
If you want to reduce your interest payments and lower your debt, try the free Debt Optimizer by MoneyTips.