If you are living paycheck-to-paycheck, you already know it is not easy. You always struggle to make ends meet, especially at the end of each month. In an already grim situation, unexpected expenses can make matters worse.
Unfortunate incidents leading to medical emergencies can prove to be burdensome financially. Other recurrent expenses, such as student loan EMI, credit card bills, etc., can add on and become overwhelming.
However, with some changes in your lifestyle and spending patterns, you can break the cycle of living paycheck to paycheck. Koshex can help you get started with your savings and investment journey.
6 Sureshot Ways to Break the Cycle of Living Paycheck to Paycheck
#1 Set a Budget
If you want to stop living paycheck-to-paycheck, the first thing you should do is create a monthly or weekly budget. The first step towards setting a budget is to track your bank account. Keep a close watch on how much money is getting credited to or debited from your bank account.
Calculate your total income and expenses in a month. In case, you don’t make a specific income every month, then calculate your monthly income from last year.
You can calculate it by first adding up the total income you made last year and then dividing it by twelve.
Once you have calculated your total monthly income, it is now time for you to subtract your total monthly expenses from it.
This calculation will help you know whether you are making enough money to cover all your expenses in a billing or payment cycle.
In case, the monthly total expenditure amount is more than your income, you have to increase your income through a side hustle or update your skill set to increase your paycheck. Otherwise, you have to look for ways to reduce your expenses.
#2 Spend only on Essentials
The best way to budget for your future expenses is to focus only on essential expenditures such as:
- Transportation cost (public transport preferred if your income is less than your expenditure)
- Health expenditure (including costs related to medication, if any, doctor appointments, and health insurance)
You may break the cycle of living paycheck to paycheck, if you stop, avoid, or decrease your non-essential expenditures.
The easiest way of doing this is to decrease your conspicuous consumption and avoid frequent dine-outs, non-essential travel plans, entertainment, etc. Suppose, you have subscriptions to Netflix, Amazon Prime, or other OTT services, you may pause or cancel one or more of those.
Once you have adjusted your budget by concentrating on your essentials, you can now check again how much you are saving every month. If you are saving more every month now, you are on the right path to financial prudence.
#3 Prepare yourself for the Unexpected
Always expect the unexpected, and be prepared for it. You may lose your job or income source suddenly. Accidents or other health emergencies, car or home repair, and upkeep can crop up without notice.
It helps to be prepared by creating an emergency fund. Start saving some money every month or week. Financial experts suggest that you should have an emergency fund that helps you to sustain for at least three months.
In addition, you should check the insurance coverage. This will help you know the things that get covered in case of an emergency or unexpected event.
Also, check whether deductibles or co-pay options are available for managing any emergency situation.
#4 Become Debt Free
You can’t save money adequately if you are paying EMIs to service your debts. If you want to stop living paycheck to paycheck, try to get out of debt as quickly as possible.
Try to keep some additional funds every month to pay more than required to service high-interest consumer loans, credit card bills, student debt, auto loans, or others.
Every debt has two components: the principal amount of the loan and interest. Try decreasing your principal loan amount month after month so that the interest amount also goes down.
To lower your expenditure, you can also look for options to decrease monthly payments. One of the ways to decrease the expenditure is to consolidate your debt by applying for a low-interest personal loan.
This will help you pay off your high-interest loans fast and consequently lower your monthly debt payment amount.
#5 Increase Down Payment Amount
The best way to decrease your monthly debt amount is to make a larger down payment than the minimum required amount.
When you pay a larger down payment while buying a car or house, your overall debt decreases. This, in turn, lowers your monthly loan repayment amount.
If you are planning to buy a car or house, the best thing you can do is to plan for it in advance. This will give you enough time to save more money over the years and therefore make a larger down payment at the time of buying your dream house or car. An example will help you understand.
Suppose you want to buy a house, you can invest a certain amount of money (say, INR 10,000 per month) in a mutual fund for a certain number of years (say, five years) before buying a house.
As mutual fund return is usually around 10-12% (more than the inflation rate of the current 7.41%), you can create an adequate corpus in those 5 years.
This will help you make a larger down payment to buy your home. This way, you can keep your debt amount low and pay less every month.
If your income is not adequate, you may also hold off on your major buying decisions. This will help you avoid any major debt and pay a regular monthly payment for debt servicing.
#6 Increase your Monthly Income
Try to boost your income by:
- Taking up a part-time job
- Earning passive income
- Taking up gig works
You can also enhance your skill set to negotiate a salary increase in your current organisation or another company.
If you are a Java-based software developer, you can learn Python to upskill and ask your company for a raise. As the demand for Python developers is high, you can apply to other companies and significantly increase your income.
With significant progress in the online world (think Web 2.0 or Web 3.0), becoming an entrepreneur has become relatively easier.
You can start your eCommerce shop, digital marketing company, or online project to increase your income. You can sell some of your unused items on eBay or other platforms to make extra cash.
If you follow some or all of these tips, you can improve your financial condition considerably. This will help you save more money to fulfill your short-term and long-term goals.
Work towards fulfilling your financial goals, saving more, increasing wealth, and getting out of the vicious cycle of living paycheck to paycheck.
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