How to Stop Living From Paycheck to Paycheck

When you live paycheck to paycheck, you are constantly scrambling to make ends meet or running out of money before the end of the month. It can be stressful because you feel like you never have quite enough to cover all your bills—and buy those things you want each month. When you live paycheck to paycheck, it is nearly impossible to get ahead financially. You may not be able to handle even a $500 emergency. Often, you end up overspending each month, and you run up more debt each month.

If your employer is paying you with a prepaid debit card, it may be even more difficult to stop living from paycheck to paycheck—but it can be done. These steps will help you start thriving financially so you can begin reaching your financial goals

01
Learn to Budget

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The biggest thing you can do is to learn to budget effectively. Anyone can write down a monthly budget. However, writing down a budget and living on a budget are two totally different things. When you are budgeting effectively you are tracking your spending, and you stop spending when you run out of money.

A budget that actually works has all of your expenses built into it so that you are not surprised when your car registration and taxes are due—or when you have to pay your insurance premiums. It also helps you deal with fluctuating bills, such as higher heating bills in the winter and higher air conditioning bills in the summer.

This is the biggest step you can take to stop living from paycheck to paycheck. It can also stop you from having periods where you go crazy with spending and end up blowing all of your money for the rest of the month. 

02
Cut Back on Your Spending

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Once you have established a working budget, you need to cut back on your spending. This will free up money enabling you to get out of debt and you can put into an emergency fund. Once you pay off your debt, you will have more money to spend each month. The challenge in the beginning (when you have extra cash in the bank) is to find ways to save in nearly every category (from food costs to entertainment to family vacations). As you get better at saving, you will be able to find even more ways to save.

The key to cutting back is to challenge yourself to spend $50 less a week on groceries or an amount that is line with your budget. If you work on cutting back in increments, it is more manageable and you will be more likely to be successful at cutting back. Instead of completely slashing one category, try reducing spending in several categories by as little as $10 or $20 a month. These extra savings will add up quickly, and you can try to cut back more the next month.

03
Set Money Aside Each Month

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The best way to stop living from paycheck to paycheck is to have money in the bank. You can do this by taking money out of each paycheck. For your initial emergency fund, you should have one month’s paycheck in the bank.

Once you're out of debt, you can begin building a larger emergency fund. For instance, take 10 percent or 20 percent out of each month's paycheck for your emergency fund. This emergency fund is the key to stop living from paycheck to paycheck in the long-term. When you have a year’s worth of expenses in the bank, you feel better equipped to deal with life’s unexpected challenges. Even if you start with just $50 a paycheck, you will start to feel more confident about handling your finances.

Just be sure you don't dip into your savings once you begin setting it aside. If you know that you will be tempted to dip into your savings, consider making it harder to do this by opening an online savings account or putting the money in a separate bank. If you know that it will take two or three days (or an extra trip to a bank) to access the money, it can help curtail your impulse purchases. You should also consider putting some money in an account you can't touch at all, like a three-month CD.

04
Get Out of Debt and Stop Using Your Credit Cards

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Another thing you can do is to get out of debt. Your debt is eating up a portion of each paycheck and can hold you back from doing the things you want to do the most. Logically, you won't get out of debt if you continue to put money on your credit cards. You need to stop using your credit cards until you are completely out of debt, even if you believe the rewards are worth the credit card. This will help you to control and monitor your spending. If you lack willpower, cut up all your credit cards but one and put all your credit on that—and pay it off each month, no matter what.

While you're doing this, avoid taking out a car loan or other types of loans until you have paid off your debt completely. Your emergency fund can help you pay for car repairs and cover other unexpected expenses so that you no longer have to rely on credit cards to get out of a tight situation. If you want to speed up paying off your debt, you may want to take on an extra part-time job. Put all of the money you make moonlighting and put it toward paying down your debt. Once you are debt free, you can quit your second job and you'll be in a better financial situation. 

05
Don't Rely on Bonuses to Get By

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When your company offers regular bonuses, you may begin to rely on your bonus as part of your budget. Because this is not guaranteed income and your company can stop giving out bonuses at any point, you should never rely on your bonus to cover your expenses. Instead, you should create a spending plan for your bonuses. You can use it to pay down debt more quickly or to increase your emergency fund.