Monthly Challenge: Get the Most from Your Paycheck

Posted on 15th Sep, 2016 by Barbara Davidson

If you are living paycheck to paycheck, you’re not alone — it’s far more common than you think. According to Forbes Reports, 56% of Americans have less than $1,000 in their checking and savings combined.1

Breaking the cycle of living paycheck to paycheck isn’t just about making more. In fact, 25% of Americans making over $100,000 a year still struggle to make ends meet due to piles of student debt, increased cost of living (especially in places with a strong job market) and long working hours that escalate the frequency of convenience-based dining.2

Increasing your income isn’t always an option, nor is it always a solution. Instead, it’s best to focus on what you can do now to make your paycheck stretch farther than you think possible. Take these steps to stop living paycheck to paycheck and just start living.

 

Step 1: Evaluate Your Pay Stub

The first step to get the most out of your budget is to understand how your take-home pay is calculated.

  1. Think back to your last tax return. Did you owe a lot or did you receive a lot back? If you fall in either category, you may need to adjust your tax withholding. Take a look at your paystub and see what is being withheld. Is it all up to date? A good way to check is through the IRS’s withholding calculator.
  2. If your company offers benefits, take note of your medical insurance cost and your 401(K) contribution. We’ll talk more about how you can adjust these to your benefit in Step 4.

After you understand the total you should receive every month, it’s time to see how you can adjust your spending habits to stretch your income wisely.

 

Step 2: Examine Your Spending Habits

Next, it’s time to sort through your spending habits. Find out where your paycheck is currently going to help identify the areas for improvement. You can go through your bank statements, credit card activity and other expenses manually or take advantage of one of several tools available online:

Mint

Cost: Free

Where: Desktop, App

You Need a Budget

Cost: Free 30-day trial, then $5/month or $50/year

Where: Desktop, App

Buxfer

Cost: Basic level: Free, Plus: $3.99/month, Pro: $4.99/month

Where: Desktop, App

PocketSmith

Cost: Basic level: Free, Premium: $9.95/month, Super: $19.95/month

Where: Desktop, App

 

Step 3: Identify Areas For Improvement

This part may seem tedious and frustrating at first, but without thoroughly looking into what each transaction truly is, you’ll end up putting a Band-Aid on a wound than needs stiches. Step 3 may lead you to some major realizations about your spending habits. It could also encourage you to falsely justify things you really want but don’t truly need. It is crucial that you’re patient, thorough and above all, honest with yourself and your needs versus wants.

Start by sorting all your regularly occurring expenses into two categories. If you struggle to define the expense, see how a budgeting tracker labels that transaction. If you are struggling to define the difference between need and want, ask yourself if that expense is something you can physically live without. Sometimes, an item can be a want or a need depending on the circumstance. For example, a pair of new shoes in the midst of a shopping spree is a want. A pair of shoes for your work attire is a different case and can be seen as a need. Use your best judgment, or see our table below for examples:

Need

Want

Once you have these things categorized, it’s time to start making cuts. Start with your “wants” and work your way back to your needs. Most frivolous spending happens within the want-based purchases, so this will be the most important area to start budgeting closely. Challenge yourself to spend only 50% of your “want” budget. Here are some important questions to ask yourself to help keep you from making unwanted purchases:

Your needs are not immune to cutbacks, but cutbacks from your need box tend to be more limiting. That doesn’t mean impossible! In our next step, we’ll share some cutbacks that are easier than you think for both your needs and wants!

 

Step 4: Start Cutting Back

Food

Entertainment

Insurance

 

Step 5: Budget for the Future

Many people end up living paycheck to paycheck as a result of an emergency expense that forced them out of their means. In a recent Federal Reserve Board survey, 47% of respondents said in a case of a $400 emergency, they would cover the expense by borrowing or selling something.3 In another study, 23% of Americans would turn to a credit card in case of emergency. By building up savings, you can help prevent that cycle from ever starting. There are many different savings plans and options depending on your current financial status. Check out these related blog posts to help you get started:

 

 

1Holmes, J. (January 12, 2016). More than half of Americans reportedly have less than $1,000 to their name. Retrieved August 17, 2016, from http://www.esquire.com/news-politics/news/a41147/half-of-americans-less-than-1000/

2Kasperkevic, J. (December 25, 2015). $100,000 and up is not enough – even the ‘rich’ live paycheck to paycheck. Retrieved August 18, 2016, from https://www.theguardian.com/business/2015/dec/25/wealthy-americans-living-paycheck-to-paycheck-income-paying-bills

3Gabler, N. (May 2016). The secret shame of middle-class Americans. Retrieved August 18, 2016, from http://www.theatlantic.com/magazine/archive/2016/05/my-secret-shame/476415/

 

 

About Barbara Davidson

Babs is a content writer at Enova International, Inc. with a Bachelors in Cinema Studies and English from the University of Illinois (ILL-INI!). She loves binge watching musicals, reading in the (sporadic) Chicago sunshine and discovering great new places to eat. Accio, tacos! Find about more about her on Google+.