When I got my first ‘real job’ I felt like I was rich. Looking back this was far from accurate. I was earning less than $20,000 per year and living paycheck to paycheck in a big way. In fact, my entire paycheck was usually gone the day before I received my weekly pay.
My gas tank was drained, the only food in my cupboards was a box of hamburger helper and I spent my day in anticipation of the next when I’d finally get paid again.
It’s fair to say that living on less than $20,000 per year can be hard, but a few years later, I was able to stop the paycheck to paycheck cycle and actually build savings on that same salary.
If you’re getting ready to enter the workforce the best thing you can do is prevent paycheck to paycheck living and put yourself ahead of the game right from the start. You can do it no matter your income if you’re creative. Here’s what to do.
Plan Before You Get Paid
When you go from completely broke to receiving a paycheck, your outlook on money changes in a big way – even if your new salary is less than amazing.
You worked hard and now you deserve to reward yourself, right? This is the mentality of many people living paycheck to paycheck. They feel the need to reward themselves for a job well done before taking into consideration any of their expenses or financial goals. You should do the opposite.
Have a plan before you get paid. All of your expenses need to come in below the amount of your net income. This is the only way you’re going to be able to create a buffer that will prevent paycheck to paycheck living after college.
Keep Your Expenses Low
For the past four years, you’ve kept your expenses extremely low so what’s another year or two? If you can keep your expenses lower than your income you’ll be on track.
Here are some things to budget for:
- Debt repayments
- Phone/Internet (Cheapest Phone Options)
- 401k contributions
When you’re on your own, there are a lot of necessary expenses to consider. Create yourself a realistic budget, so you can see where you stand on expenses. If you’re currently spending more than you’re earning you need to make some drastic changes now.
Focus on the areas where you can make the biggest difference, like rent or food. Also realize that you might have to cut most of the extras out of your budget until you can better afford them.
Keep a written budget for at least several months so that you can get into a groove of keeping your bills paid and expenses low. If writing isn't your thing, consider using a free app like Personal Capital where you can see a digital budget of your income and expenses.
Build Up Your Buffers
One of the keys to preventing the paycheck to paycheck cycle is by always living on last month’s income. You do that with a budget and cash savings.
Aside from saving in your employer’s retirement plan (which you should do but is money you can’t touch) you need to be saving an emergency fund.
Most financial experts recommend saving up 3-6 months’ worth of living expenses as an emergency fund. I like to go one step above that and also keep at least a $1,000 buffer in my checking account just in case.
One of my favorite ways to help automatically build this is with a free tool called Digit. Digit analyzes your spending habits, and transfers tiny amounts into a savings account for you automatically. Over time, this can turn into a nice emergency fund if you need it.
Avoid Credit Cards
There’s a time and place for credit cards, but if you’re living paycheck to paycheck or are working on establishing a budget now is not that time.
Credit cards can be a huge financial trap if you’re not careful. It’s very easy to swipe a card for frivolous purchases. You can quickly end up with maxed out credit cards costing your over 25% interest.
It’s better to avoid credit cards altogether when you’re just getting established. If you already have credit cards and are looking for an easy solution, check out Debitize. Just like it sounds, Debitize turns your credit card into a debit card – for free! This can be a great way to help you manage the credit cards you already have.
Get Rid Of Your Debt
The more debt you have the more likely it will be for you to live paycheck to paycheck.
If you already have credit card debt it should be the first debt that you pay off. Any other high interest debt also needs to go. Save up your emergency fund while making minimum debt payments and then after building your savings apply more to getting rid of your debt altogether.
As far as paying off student loan debt early there’s benefits to both sides. You ultimately need to figure out if it’s best for you to work on paying those down quickly or putting your money elsewhere. (You should also check out these legal ways to lower student loan payments.)
Make Sacrifices Now To Set Yourself Up For Success Later
I know how painful it can be for someone to tell you to sacrifice and save now. Trust me, I completely get it and ignored the advice for years. In those years I lived paycheck to paycheck and have absolutely nothing to show for any of the money that I earned.
If you want to prevent the financial stress that over three-quarters of our country goes through on a regular basis a little work will be required from you. That doesn’t mean you have to be all work and no play but that you responsibly balance the work and play.
If you focus on keeping your expenses low and saving money each and every time you get paid you’ll be well on your way to establishing solid financial ground for yourself.
Would you add anything else to the list?
Photo Credit: kingjon / 123RF Stock Photo