Monthly Challenge: Get the Most from Your Paycheck
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.
- 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.
- 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:
Cost: Free
Where: Desktop, App
- Sync any account information quickly, including your credit cards, car payments, IRA and more. Mint will put each transaction in a category and display a dashboard full of graphs so you can digest the big picture of your spending trends easily.
- Once you’re ready to set a budget, Mint supplies great tools to set limits based on your transaction categories. You can also set up alerts when you are close to hitting the budget for a category, easily reminding you of the areas in which you can cut back.
Cost: Free 30-day trial, then $5/month or $50/year
Where: Desktop, App
- This software is meant for those who not only live paycheck to paycheck, but also tend to overspend and have debt to pay off. The philosophy behind You Need a Budget asks its users to “give every dollar a job.” This means some serious categorization to make sure your money is being allocated to the right place.
- Monthly budgets are helpful, but they don’t always account for sporadic (but predictable) expenses like birthday gifts, haircuts, car insurance and more. You Need a Budget goes so far as to account for those expenses on a monthly basis so that you can stay on track for your debt payments.
Cost: Basic level: Free, Plus: $3.99/month, Pro: $4.99/month
Where: Desktop, App
- Families and roommates would benefit from the shared expense feature of Buxfer. Not only can you sync accounts for monitoring and categorization, you can also track shared expenses and even repay another user via their site for free.
- Buxfer does a great job with proactive budgeting tactics. This includes simple things like bill reminders or notifications that you’re almost at your budget in a category. It also includes recommendations based on your spending history and upcoming bill payments. The more you use it, the more intelligent it gets.
Cost: Basic level: Free, Premium: $9.95/month, Super: $19.95/month
Where: Desktop, App
- If you have international accounts, PocketSmith is a great choice for you. In addition to the typical features budgeting tools offer, PocketSmith allows you to track accounts, assets and liabilities from different countries with automated currency conversion based on daily rates.
- Similar to You Need a Budget, PocketSmith focuses on flexible budgeting options that accommodate life changes with their What-If Scenario planner; it tests your financial decisions and calculates potential outcomes.
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
- Rent
- Insurance
- Car + gas
- Utilities
- Groceries
- Phone
Want
- Dining out
- Entertainment
- Cable
- Clothes
- Travel
- Hobbies
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:
- Just because something is on sale does not mean you have to purchase it. Ask yourself: “Would I have considered purchasing this if it wasn’t on sale?” If you answer is no, don’t buy it.
- If you answered yes or if the item is regular price, ask yourself: “Will I be happy that I made this purchase 6 months from now? A year from now?” If your answer is no, don’t buy it.
- If you answered yes, leave the store. Give yourself 24 – 48 hours to think about it (or maybe even compare prices online for a better deal). If after that time, you are still confident you want it — and have the budget for it — go for it.
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
- Cut back on dining out. Even eliminating your daily cup of coffee during the week could save you over $50 a month.
- Ever wonder what differentiates brand name from generic? The price… and that’s about it! The lower price of generic is not driven by lesser-quality ingredients, but is often simply a difference in advertising budget. Big brands spend more to advertise than grocery stores, and that cost trickles down to the cost of their product. Compare labels to be sure.
- Purchase a water filter pitcher or water bottle as an alternative to bottled water, an unnecessary expense that racks up over time.
Entertainment
- Cancel your cable. While it may be a tough one to quit at first, you’ll find that many of your favorite shows are available on the network’s website within a week of showing. Your patience will pay with big savings! You can also opt for a cheaper cable-like subscription through streaming sites.
- Sign up for a library card for book and media entertainment. The library is not just for books anymore — check out your local branch for DVDs, CDs and more. Some libraries even have streaming services and eBooks available through their website, so you never even have to leave your couch.
Insurance
- Medical insurance, now required by law, is a monthly cost that cannot be ignored. However, look into your options. Depending on your company, there may be more than one plan available for you to choose from. The plan you chose when you originally started your job may not be the one that best suits your lifestyle now. Evaluate it before open enrollment season (usually toward the end of the year), and see if it makes sense to choose a more basic package.
- Do you split your time between your car and public transit? If you don’t drive a lot, consider getting insurance that is personalized to your lifestyle. Insurance agencies like Metromile cater to low-mileage drivers and adjust their rates accordingly.
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/