Living from Paycheck to Paycheck: How to Get Out of the Cycle

For the first several years of our adult lives, Sarah and I lived paycheck to paycheck. Most of the time, we would have been unable to pay our bills when they were due if our next paycheck didn’t safely arrive in our account right on schedule.

From a super short term perspective — on the order of hours and days — it made sense. We had money in our account. We wanted something. We went and bought it. Our next paycheck would help us deal with our bills, so we didn’t worry about it. Still, if we ever stepped back and looked at a wider perspective, it was disastrous.

We had no emergency fund. If a real problem came up, like a car not starting, we were in a real jam.

We had extremely limited domestic skills. We didn’t know how to prepare many meals because we rarely ate at home, and everything seemed difficult and time consuming.

We didn’t know how to repair basic things, so something like a toilet problem meant a panicked call to a landlord and soaking a bunch of our clothes.

Basically, we just threw money at domestic problems like food — we usually went out to eat, got takeout or made super-simple convenience meals, all of which were expensive — and basic repairs. We’d call the landlord for simple things, and our inability to repair things caused damage to our own stuff while we waited — plus it made life really inconvenient and unpleasant at times.

We walked a professional tightrope. We were so dependent on our next paycheck to keep the bills paid that we were both afraid to rock the boat at all at our workplace, and thus our supervisors could demand ridiculous things from us. Job searching was fraught with danger because we couldn’t handle getting fired from our old job while we were interviewing for a new one.

We were making zero progress toward our long term goals in life. We weren’t saving for a house down payment. We weren’t saving for our next car. We were making minimum payments on our debts and often racking up more credit card debt. The one good thing we did was start our retirement contributions early, something that a few mentors strongly encouraged us to do, and we did simply out of trust and respect.

Every single one of those things added additional stress to our lives. Not only did these events themselves cause stress when they happened, but they also added stress if we thought about them much. Often, we avoided thinking about them — if we got too stressed, we’d just spend money on something to distract us.

That was our reality for our first several years of our adult professional life. We lived paycheck to paycheck. And that description of life above? It’s got a lot in common with how most Americans live.

The shocking thing is that the vast majority of Americans also live paycheck to paycheck — somewhere between 75% and 80%, depending on how you count it. Most people would hit serious financial troubles if their next paycheck didn’t arrive in full and on time.

How did we break out of it? I’ve written before about our own story, but today I want to step back and generalize it a little, turning it into some practical steps that almost anyone can take to get out of their own paycheck to paycheck lifestyle.

But first, let’s address the why.

Why should someone want to get out of paycheck to paycheck living?

If you break away from living paycheck to paycheck, meaning that you are consistently earning more than you are spending, you wouldn’t suffer any ill effects if you missed a few paychecks (aside from having to withdraw some money from a savings account), and you’re making progress toward your biggest life goals, almost all of the negative things mentioned above go away.

You’re no longer scared to death at work. While it might not be super convenient, it’s no longer the end of the world if you lose your job. You can survive for a while without it, giving you time to find another one. This frees you up to take less abusive behavior at work and also makes searching for another job a lot less scary.

Most life emergencies are no longer stressful disasters. Most things, like a car issue or an emergency trip or even a sudden job loss, aren’t apocalyptic any more. You’ll still be able to pay the bills. You’ll be able to handle the sudden expense. It’s not a problem, just an inconvenience.

You’re actually moving toward big life goals. You’re saving for retirement. You’re saving for a down payment. Those things are actually moving toward reality instead of being nebulous dreams, and that feels great.

You’re less scared to try new things, because you can handle the downside of a small failure. You become more willing to try new things and do more things for yourself because the worst case scenarios become a lot less disastrous. If you try fixing that toilet and it doesn’t work, it’s not too bad because you can handle the costs of any issues you might cause. This encourages you to try doing those things, which means that you start to feel less worried and more confident about all kinds of things in life.

A lot of everyday stress just goes away. All of this is good, but one of the biggest benefits is how it all adds up to a lot less everyday stress. For me, it actually cleared up some minor health issues, and it definitely made day to day life better. I was a lot less jumpy and emotionally touchy once we got away from paycheck to paycheck living, and the same was true for Sarah. Life was less stressful and more enjoyable.

Yes, breaking away from paycheck to paycheck living means making sone changes to your life, but even those aren’t as bad as they seem initially. Often, we’re afraid of change just because it’s a change in routine, not because it’s actually bad. We visualize horrible outcomes because we’re creatures of habit.

Here are some strategies for breaking away from paycheck to paycheck living that can work for almost everyone.

The first step is consistently earning more than you’re spending.

Almost every month, you have to be bringing in more money than you’re spending. There are a lot of ways to accomplish that, but if you’re not doing this month after month after month, you simply can’t get away from paycheck to paycheck living.

You have to spend less than you earn during normal months as well as months where there are some smaller unexpected events. Yeah, there are sometimes disaster months where everything goes wrong and you do have to spend more than you make, but those should be rare and you should have savings to tap (we’ll get back to that later).

This can be incredibly difficult, especially if your income is very low. You are likely going to have to make some tough lifestyle choices. Here are some things to think seriously about.

If you pay for medicine or other medical services, can you ask about lower cost options? There may be options that will work for you that require less expense out of pocket. Are there things you can do at home on your own? Are there less expensive prescriptions or can some of them be eliminated? It doesn’t hurt to ask.

Can you live in a different place that has lower expenses per month? This might mean living with a relative or renting a place with multiple roommates. Your goal should be to significantly reduce the monthly expense of keeping a roof over your head.

Can you drop your entertainment subscriptions? Do you have cable television? Do you have cellular data for your cell phone? Basically, if it’s a monthly service you have, consider significantly reducing it or dropping it. Switch to a low end phone with no data from an inexpensive service like Ting.

Are you eating an inexpensive diet with very little or no food from restaurants? A truly inexpensive diet is one that almost entirely consists of foods you prepare for yourself, mostly made up of inexpensive staples like rice, beans, pasta, peanut butter and so on. Your food intake should be modeled on that and should involve very little or no money spent at restaurants. When you’re out of the home, you should be taking meals with you so that you’re not tempted to eat at restaurants.

Are you signed up for all assistance programs you’re eligible for? If you’re struggling with a very low income, make sure that you’re getting the benefits of any assistance programs you’re eligible for. They can make an enormous difference. You can get started by contacting your state’s Department of Human Services — look them up online and give them a call. They can help you identify programs that can help, from local food pantries that can get food on your table, clothing pantries that can keep clothes on your back or assistance with medical costs.

Can you earn more by taking up a part time job? If you’re really struggling financially but working less than 40 hours a week, consider adding a part time job to the mix to bring in more income. Twenty hours a week at $10 an hour is another $200 each week, which can make a big difference to a person’s finances.

Can you ask your boss for a raise or for more hours? You’re likely to have more success with this if you’re always on time at work, deliver things by their deadline with high consistency, and have good results and performance reviews. If you’re not doing that at work, aim to start.

Can you give up some vices? If you smoke, consider dropping the smoking habit. If you drink, consider dropping the drinking habit. If you use drugs, consider dropping the drug habit. If you compulsively buy anything, break that compulsion.

Are there better “bang for the buck” options for how you spend for nonessential things? For example, you can get a lot of free entertainment from the movies and books available from your local library rather than buying books and paying for Netflix or cable.

Can you reorganize some of your debt, particularly credit card debt and student loan debt? Consider consolidating your student loan debt, particularly if you can lock in a lower interest rate and a lower monthly payment. Also, consider doing credit card balance transfers in order to reduce the interest rate on that debt. While it’s a good idea to lower interest rates, it’s a bad idea to get collateralized debt like a home mortgage to pay off non-collateralized debt like a student loan or a credit card. If they can’t repossess, don’t turn that debt into something they can repossess.

What about small steps, like buying only store brand household supplies? There are many, many little things you can do to trim a bit off your spending.

Remember, the goal here is to stabilize your income and spending so that you’re consistently spending less than you bring in each month. These changes are intended to bring permanent changes to your spending and income that should bring you closer to that target. Many people simply overlook these things, even though they’re obvious, and just assume that they can’t make it work. You can do this, no matter what your income level is.

When you’re making more than you’re spending, start doing something smart with the difference.

For us, cutting back on our spending was really only half the battle — or less than half. A big part of our challenge was to start doing something wise with that extra money when we started to really see the impact in our bank account.

We were so used to just spending any extra money in our checking account that while our life changes caused more and more extra money to appear, we were still very tempted to just spend all of it.

Our solution was to simply do something wise with any surplus we found in our checking account as soon as we discovered it, and to eventually automate those things. I’ll get back to automating in a second.

What kind of wise things did we do? Here are some suggestions, in order of priority.

Sell off some unused stuff to give yourself a head start on this list. Look through your closets and your rarely-used belongings and see if any of those items can easily be sold off. Take them to Craigslist or to local community buy/sell/trade groups on Facebook and turn those items you likely won’t use again into some cash. Use the cash for some of the items on this list to give yourself a nice running start.

Build up enough of a buffer in your checking account that you’re no longer at any significant risk of overdrafting. One expense that can often hound people who are living paycheck to paycheck is overdrafts. If you are regularly overdrafting your checking account, you’re frequently getting hit with fees of $35 or more and those can really add up and hurt. Your first step should be to put yourself in a situation where those don’t happen. Aim to have a constant buffer in your checking account of a few hundred dollars so that you don’t accidentally overdraft your account. For example, some people view a balance of $1,000 as being their “zero balance” and aim to always stay above that. Consider having a “zero balance” of $300 or $500 where your goal is to always stay above that number, no matter what.

Get caught up on your bills so that you’re no longer facing late fees. Once you’re out of the danger of overdrafts, aim to get caught up on all of your bills so that you’re no longer generating late fees. You should aim to pay all of your bills on time, both to avoid the direct expense of being late but also because being late consistently can have a negative impact on your credit score, which can then cause you to have worse interest rates on loans and even affect job applications.

The simple act of getting yourself away from overdrafts and late fees can make a huge difference in a person’s day to day financial life and can be a major milestone in terms of moving away from paycheck to paycheck living, but there are many more things you can and should be doing. Here’s what to do next.

Have an emergency fund in a savings account. An emergency fund is a pool of cash that you can tap in an emergency situation, so when an unexpected event occurs you have the money available to deal with it easily. You want an emergency fund that’s going to be available in all kinds of emergencies and safe from many disasters, and the best option for that is cash in a savings account at a bank where you have local branch and ATM access. It’s not a bad idea to use a different bank than your regular one so that you’re not tempted to tap the savings account every time you use your bank card. Whenever you have spare cash in checking, move it over to this emergency fund, out of sight and out of mind until there’s an emergency.

Pay off your debts, starting with your highest interest debt. Your highest interest debt is the one that’s costing you the most in interest, so pay it off first. Simply take extra money in your checking account from the smart spending tactics above and make an extra payment on that debt. If you pay it off, great! That’s one less minimum payment you have to deal with each month, and now you can tackle whichever debt is now the highest in interest rates.

I suggest focusing on these two steps until you have an emergency fund that’s at least equal to two paychecks and you’ve eliminated all of your debts with a higher interest rate than 10%.

Consider automating your positive financial moves. By this, I mean that you instruct your bank to move a certain amount each week or each month into your emergency fund, or you set up an automatic monthly payment toward one of your debts that’s bigger than the minimum payment, or you set up an automatic contribution into your retirement plan. For that kind of thing to work, you have to be consistently spending less than you earn such that your checking account is growing over time.

The advantage of automation is that you don’t have to remember to do something with that money and you don’t have to talk yourself into doing it each week and each month. It just happens. The only thing you have to worry about is making sure there’s always plenty in your checking account, which is why it’s a good idea to carry a buffer in there.

Start saving for major goals coming in the future. For most people that means saving for retirement. For some, it can mean other goals, like saving for a house down payment, saving for your next car or saving for a child’s education. At this point, your choice of goals is highly dependent on what you want out of life, but I will say that saving for your own retirement is never a bad option. You will virtually always be glad you did that.

Saving for retirement is quite easy. Most Americans are eligible for a Roth IRA account, which is kind of like a special savings account for retirement. One big difference is that once you put money into that account, you get to choose what is done with that money — a good all-around option is to just choose a target retirement fund. Money put into a Roth IRA can be withdrawn without penalty if you need it later, but the money earned in the account cannot be withdrawn without taking a penalty. However, if you wait until you’re at retirement age, the money earned in that account can be withdrawn without any penalties or income taxes. Yes, this is a way to make money without paying taxes on it if you’re willing to wait for retirement on that money.

It’s all about a lot of individual small steps adding together to make a big leap.

Almost all of the individual moves in this article are simple ones, and many Americans can do many of them with ease. The trick is actually doing them. People are often resistant to making changes in their lives and these steps represent change. However, if you want something different in your life, you have to start doing something differently.

These steps work. They were transformative for Sarah and myself. We don’t earn an exceptional income — neither of us have earned six figures in our lives, other than a couple of really exceptional years where we were buried in work, and we have three children at home. Still, we were able to follow steps like these and escape paycheck-to-paycheck living, and then build on that to pay off all of our debts, buy a home for our family and pay that off, too, over the course of about six and a half years.

It starts with simple daily changes that get you in a position where you’re spending less than you earn before making smart moves with the difference. Before long, you’ll leave paycheck-to-paycheck life behind.

Personal Expenses: How to Track Them

Once every few days, I open up a spreadsheet on my computer that I’ve been using for many years. Into that spreadsheet, I type in several lines of information — places where I’ve spent money, how much I spent there, the date I spent that money and what type of expense that was. Once I type those things in, a few automatic calculations occur and I have a nice view of my expenses over the last 30 days, the last year and since I started tracking such information.

It’s a nice little system, one that I’ve customized for my own needs over the years (I was a software developer in a previous stage of my life, so doing this kind of thing is kind of second nature for me), but many of the ideas are borrowed from some commercial software packages.

I consider it one of the most powerful things I do in terms of keeping my spending in check. Why is that the case, though? And how exactly do I do it?

Here are six reasons why you should be tracking your personal expenses.

1. Tracking your expenses helps make you more mindful of spending in the moment.

Once you get into the habit of tracking your expenses, you’ll find that the process makes you more mindful of the spending choices you make throughout the day. You’ll begin to associate things like, say, that $5 stop at the coffee shop with the impact it has on your total spending at the end of the month, and that will motivate you to find a cheaper solution or to cut back on a habit that really adds up.

It’s simple repetition, really. The more times you look at and think about a particular type of expense and the big impact it’s having on you, the more likely you are to think of that expense with a more critical eye.

This doesn’t mean that tracking expenses will cause you to never spend money on anything fun ever again. Rather, it will simply make you more mindful of those expenses. There might be times where you recognize you’re not getting a whole lot of value out of a treat, but at other times, it’s something that’s really worth your while.

2. Tracking your expenses helps you to see spending mistakes before they become disastrous personal finance problems.

One of the biggest reasons that people find themselves in financial trouble is due to overspending. People simply get into a routine of spending as much as (or more than) they earn. Because of that, it becomes very difficult to achieve any long-term financial goals and, if any sort of unexpected events occur, it can be disastrous. The truth is that just shy of 80% of U.S. workers live paycheck to paycheck.

While it can be easy to point to one or two big expenses that lead to overspending, it’s often a myriad of little expenses that are the true culprit. It’s easy to pick out that $100 expense, but 10 expenses of $10 each can often go without much notice. It’s only $10, after all, but if that $10 happens again and again, it can add up swiftly.

Tracking your expenses can expose overspending of all sizes, and if you do it diligently, expense tracking can identify when it’s a small issue before it becomes a larger issue where you’re struggling to make ends meet.

3. Expense tracking provides the backbone for a workable and sensible budget.

Many people associate “financial responsibility” with “making a personal budget,” but the truth is that a good workable budget is built on top of an accurate picture of your spending, which you can really only build through tracking your expenses. Everyone has different spending habits and routines, and simply plopping a ready-made budget on top of your individual habits will almost always result in disaster.

Rather, a good budget starts by taking a deep look at how you’ve been spending your money, sorting that spending into sensible categories, and setting some modest goals for some of the more flexible categories.

For example, if you spend $200 on your hobbies each month, $150 is a sensible amount to budget for that category, but you don’t know how much you’re really spending — and thus how much to budget — without tracking your expenses along the way. Knowing your actual spending lets you make realistic budget numbers that can really help you make positive financial progress.

4. It can improve your relationship with your partner.

Money is one of the most common sources of disputes between couples, and it often boils down to spending habits. If one partner spends more on non-essentials than the other partner, it can easily lead to friction, particularly when that non-essential spending is causing other financial problems.

Tracking your expenses is a very powerful way to not only get a clearer view of your own spending blind spots, but it can also provide useful information in money conversations. A simple record of where the money went can reduce a “he said/she said” dynamic down to actual numbers.

While it can’t solve all financial disputes, it can go a long way toward helping both partners identify spending problems without resorting to accusations and anger.

5. It makes it much easier to set financial goals.

A final advantage of tracking your expenses is that doing so makes it much easier to set financial goals for yourself.

You can easily set specific spending targets for yourself, such as capping your spending on a particular hobby to $50 a month. This is basically akin to budgeting, which is really just a form of financial goal setting.

However, the real advantage of setting spending goals like that is that completing those goals frees up money for bigger financial goals in life. If you are able to trim $200 a month from your spending across several categories, then you have $200 each month with which to get yourself caught up on your bills, get out of overdraft cycles, establish an emergency fund and start paying down high-interest debt.

It’s all about tracking your finances.

6. Tracking your expenses can kill financial stress.

One of the biggest sources of financial stress for most people is the eternal question of where all of the money went. A paycheck comes in and it seems like you’re flush with cash, but a few days pass and the account seems practically empty. What happened? Tracking your expenses answers that question.

Tracking all of your expenses means you know where every dime of your money is going, and that changes the question from a stressful mystery to something clear and understandable. Rather than feeling like everything is out of control, it transforms the question into one of personal decision-making, something that’s far less stressful.

In short, tracking your expenses returns the sense of control over your finances to you. You’re no longer just along for the ride on a financial roller coaster.

Getting started with tracking your expenses is quite easy.

The most straightforward way to get started is to simply write down all of your expenses in a notebook. All you need is a cheap spiral notebook and a pen.

When I first started tracking my own spending, I did it with a simple pocket notebook and a pen. Whenever I spent money on anything, I either jotted it down in that notebook immediately or I stuffed a receipt in the pages of the notebook.

I noticed several things quite quickly. The big one was that I didn’t like writing stuff down in the notebook, not because it took effort, but because doing so meant I had spent money on something and I would have to reckon with that spending later. With a lot of frivolous expenses, I didn’t want to have to reckon with it later because I knew, on a deep level, it was a bad decision.

What does that look like for you? Whenever you spend money, save that receipt, and once every day or two, write down every single item that you spent money on — the date, the item and the amount. You can (and should) also give it a category. You might find it easy to just use categories like “food,” but I take it a bit further and use categories like “basic food,” “eating out,” and “gourmet food” to differentiate between needs and different kinds of wants.

When I’m recording expenses, I go through grocery lists and group all of the items into “basic food,” “gourmet food,” (meaning food at the store that had a cheaper alternative) and “household supplies” by using a highlighter. I do the same for all multi-item receipts. Then, I just add a new item entitled “Food at grocery store” with the category “basic food” and the total, then another item entitled “Food at grocery store” with the category “gourmet food,” then another item entitled “Supplies at grocery store” with the category “household supplies,” and each one has the total cost of the items of that type from the receipt.

There really isn’t a good list of categories with which to sort your spending. Just come up with ones that make sense to you. You might want to just start writing them down now and leave a space for categories, then when you have a few dozen entries, come up with categories and categorize the expenses then.

I find that there is a lot of value in doing this by hand. It really helps me keep in touch with my spending in a way that just typing data into digital tools doesn’t achieve, and I find tools that automatically fill in the data to be even less impactful for me. They’re still useful, but writing it down just hits home in a deeper way.

Speaking of automated tools, there are three tools that I recommend depending on how you want to approach things. I personally do not use any of these regularly (though I’ve tried them all), mostly because I feel uncomfortable using third party tools to directly access my financial accounts, but that’s not because they’re actually insecure in any way. I just choose to minimize the number of online accounts I have that have any access to personal data.

The easiest one to use — but the one that feels the most hands-off and least helpful overall to me — is Mint, which automatically retrieves data for you from your accounts and displays it in an app. It’s free and really easy to use, but I find that it spends too much time offering me suggestions (and ads) that are irrelevant to what I want to see.

A much better option is a subscription service called You Need a Budget, which I consider the best all-around automated budgeting and expense tracking tool out there. It also retrieves data for you, but you can enter a lot of information yourself to supplement that, and it offers a lot of genuinely useful views of your data.

If you’re kind of a spreadsheet wonk, I’d like to give a nod to Tiller Money, which integrates with Google Sheets to automatically pull data from your accounts into a spreadsheet.

Once you have a month or two of data, you can start making some powerful decisions.

The actual process of recording your expenses is a powerful thing. It serves as a strong constant reminder of where your money is actually going, something that can shape your thinking as you’re recording it.

When you start to accumulate a lot of spending data, however, it becomes even more powerful. The collected data enables you to take a step back and look at your broader spending patterns.

With a month’s worth of data from tracking your spending, you can easily ask questions like, “How much money did I spend last month at coffee shops?” or “How much money did I spend last month eating out?” or “How much money did I spend last month on entertainment purchases?” The answers to those questions — and many like them, depending on the categories you’ve chosen — can really shape your thinking when it comes to spending choices.

The realization that you’re spending hundreds a month at coffee shops, $1,000 in the last month eating out at mediocre restaurants or $350 on hobbies can be a real eye-opener. Not only does it show you where your money is actually going, it can help you to realize that your money is going towards things that aren’t providing a lot of value in your life for the amount you’re spending.

When you add up your spending in each category for the month, what you’re doing is creating the backbone of a budget. You can go through all of those categories, figure out which ones are reasonable and which ones are ones where you’re overspending and can cut back, and then use those actual numbers to create a basic budget for yourself.

This whole process reveals a deep truth about budgeting. The real value of budgeting isn’t in creating neat charts and tables, but in the fact that it can identify a few of your worst spending areas and help you get better control over them. It’s not in a chart, but in how that chart changes your behavior.

For most people, a budget is going to reveal some areas of overspending on non-essential items, which you can cut back on by choice, as well as some areas of essential spending that you’d like to cut back on (like trimming bills). While earning more money is always a great solution to this problem, it’s not an immediate solution; thus, the immediate tool at hand is frugality.

One good way to start is by trimming your required monthly bills. Here are 40 tactics for trimming your ordinary monthly bills, as well as some common bills that people can delete entirely. Ask yourself whether each bill you have is necessary and, if it is, ask yourself how you can cut that bill back a little. A good first step is to simply call that company and see what can be done to make that bill smaller.

The other approach is to cut back on your non-essential spending. It’s worth noting that I think it’s a bad idea to cut non-essential spending to the bone. If you trim out all of the stuff you enjoy, you’re going to quickly resent the changes. Rather, you should try to identify the 20% (or so) of your non-essential spending that’s least important to you and cut those things, while being mindful of what you’re gaining as a result of those cuts. If you spend $400 a month eating out, see if you can trim that to $300 by cutting out the $100 spent on the most forgettable meals. If you have some expense you just don’t want to cut, look for some other expense you can cut back on a little harder.

Tracking your personal expenses takes a bit of time, but it’s a powerful nudge toward smarter spending and better financial choices.

Tracking my spending was one of the best things I started doing during my financial turnaround. It gave me a little constant nudge to avoid spending money on frivolous things and soon revealed some of my worst spending habits. Understanding the areas in my life where I was overspending — and simply knowing where all of the money was going – was a transformative change in my financial life.

Get started today. I recommend doing it by hand at first, simply because of how powerful that act is in terms of getting you to notice your expenses. After you build up some entries, start looking at the patterns and see what they’re telling you about sensible changes you can make to your spending. It does take a bit of time, but it can have an enormous impact on your use of money.