Both the rich and poor are caught in the vicious monthly paycheck circle
“Living from paycheck to paycheck means you have nothing left from your monthly income for savings or investments after paying your essential bills.” This is a reality for many immigrants, millennials, and low-income earners. The lifestyle of living in this monthly pay circle seems to cut across the board. Many six-figure earners are surprisingly also caught in this trap.
According to a recent BDO Canada Affordability Index, over half (53%) of Canadians live paycheck to paycheck, and one in four (25%) say their debt load is overwhelming. More than 27% do not have enough for their daily needs.
Breaking the paycheck to paycheck cycle takes knowledge, discipline, and a clear financial plan. Here are the best steps for immigrants and millennials toward greater financial independence:
- Track your spending.
Much of paycheck-to-paycheck spending is because you are not paying eagle-eye attention to your outflow of money. Take two to four weeks and carefully document every purchase, whether it’s by credit card or cash. At the end of the period, you will be surprised to see where some of your money is going, and you will be more conscious of your spending.
- Make savings automatic.
Experts say that if you plan to save “whatever’s leftover” after spending the rest of your paycheck, you will never put anything away. Whether you’re building up emergency savings or putting money away for retirement, that money should come out first, no matter how small the amount. Set it on automatic, so it is out of your reach before you know it.
- “Hide” your savings elsewhere.
Make sure you are putting your dollars somewhere you cannot quickly get to them. If you can easily transfer funds the same day from a savings account to a checking account at the same bank, those funds will often get spent quickly.
- Take a hard look at your fixed expenses.
Sometimes a paycheck-to-paycheck existence means you may have locked yourself into a lifestyle you cannot afford – a luxury car, the latest iPhone, and renting an expensive apartment may all be eating too deep into your monthly income. And this does not fit into the 50-30-20 budget rule.
- Evaluate needs vs. wants.
Take another hard look at your want-to-haves. Many of your expenses are necessary—mortgage, insurance, food—but the leftovers are more flexible. Try ranking your discretionary spending items from most important to least important. Gym memberships, cable TV subscriptions, and similar expenses all have cheaper alternatives. If you look, you will find.
- Choose someone to help you stay on track.
Working with someone to hold yourself accountable is probably the most important thing. This accountability partner could be an advisor, relative, spouse, or a trusted friend to increase your chances. A second party changes the picture for the better.
- Ask yourself why you need to change.
You must have a solid reason to change your habits. If you are not determined to stop living paycheck to paycheck, anything can drag you back into the habit. Are you saving to make a down payment or a second car or to make your family life easier? Having a goal makes it easier to work towards. Once you begin questioning why you are not splurging on other items, you can always revert to why you started.
- Make more money.
Making more money is easier said than done. But it is needed. There is only so much you can cut back on as you work towards going back to living below your means. Therefore, you must find creative ways to make more money. You may need to upgrade your education, so you can get a better job, find a part-time job/side hustle or work towards a passive income.
Live happily after that.
When you stop living paycheck to paycheck, your overall stress levels go down. You will have more life options because your finances are better. You can invest more and even give back and help others. The overall quality of your life will start to improve, and as the story goes, you can live happily after that.