5 Ways to Stop Living Paycheck to Paycheck

While living paycheck to paycheck is the absolute norm these days, it is an incredibly stressful way to live. It means you exhaust your entire salary until the next one arrives, leaving no room for savings, medical emergencies, or any other surprise expenses. When you are stuck in this cycle, investing in your long-term financial goals, such as retirement, a child's education, and buying a house, among others, can become challenging. This article enumerates 5 ways to break the cycle of living paycheck to paycheck so that you can start saving for financial emergencies, invest towards your financial goals, and achieve them sooner.

1. Enhance Your Financial Knowledge:

One thing that pulls individuals down from investing & planning their finances and encourages spending recklessly is a lack of financial literacy. Many individuals believe that financial planning is only for riches, and no matter how much they save, they cannot achieve their financial goals without creating huge debts.

This is absolutely not true. You need to start believing that financial planning is for everyone, and thus in order to manage your finances better, work on improving your financial knowledge. You can start reading financial articles and news, follow trustworthy financial channels (like PersonalFN) on social media, watch financial news, and listen to personal finance podcasts. Financial literacy will help you maintain a secure future for your family and prevent financial mistakes.

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2. Focus on Reducing Your Debt:

Many individuals have to live paycheck to paycheck because a larger portion of their salary goes towards repayment of existing loans like home loans, car loans, personal loans, education loans, etc. Managing other fixed and variable expenses from the remaining salary can be challenging for those who pay huge EMIs.

The reduced EMIs will help increase your monthly savings. If you have multiple loans, list them all down and make a total of how much you owe. Now, assess your income and existing savings to see how you can manage the repayment in the shortest duration. Your old loans may carry high interest rates and would likely qualify for prepayment. Try reducing your debt burden by repaying as much as possible towards such high-cost loans. Repaying the loans earlier will not only reduce your debt burden but also save a considerable interest outgo.

However, make sure you check the prepayment and foreclosure charges before clearing off the loans. Sometimes, if the loan carries high prepayment and foreclosure charges, it makes sense to make regular repayments. Generally, loans with floating interest rates, like home loans, allow loan repayments, whereas fixed interest rate loans, like personal loans, carry charges for loan prepayment.

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3. Do Not Create More Debt:

While repaying the existing loans and trying to increase your savings, it is important to limit your credit spending and not avail of more loans. While you may face a cash crunch at times, taking more loans can put you in a challenging situation of debt overhang that becomes impossible to come out. Such financial crises can mentally affect the borrower, which can further lead to severe depression or can create suicidal tendencies.

If you are unable to control your credit spending, it is advisable to get rid of your credit cards by blocking or cutting them or freezing them until you are in a better financial situation.

4. Cut Down Luxurious Expenses:

One of the key reasons why an individual has to live paycheck to paycheck is their urge to spend beyond their means, which gives them instant gratification. However, if you want to make your financial situation better, it is advisable to cut down on your unnecessary expenses and luxuries like expensive dinners and holidays and buying expensive stuff like clothes, gadgets, etc. While making such lifestyle changes can be hard initially, it is worth putting your finances together and breaking the cycle of living on paychecks.

5. Do Not Wait to Start Investing:

You may think that you will wait until you save a certain amount or earn a certain salary to start your investing journey. However, no matter how much you earn, it will not be sufficient unless you instil financial discipline.

As Brian Tracy wisely says, "A goal without a plan is only a dream". Hence, while investing for your future, it is important to set a goal-setting exercise. Your financial goals should be S.M.A.R.T. (Specific, Measurable, Adjustable, Realistic, and Time-bound). For each of your goals, you should specify a realistic time horizon and prioritise them into short-term, medium-term, and long-term goals. Creating a financial plan by setting up a budget, cutting down unnecessary expenses, and taking effective steps towards better financial growth is crucial to achieving your goals.

Living paycheck to paycheck can create financial stress in case of a financial emergency, such as medical treatment, loss of an earning family member, loss of job, etc. Instead, if you start saving and build a contingency fund, it will not create financial stress during challenging situations, and you will not have to opt for loans. Similarly, you can fund yourself to achieve your long-term financial goals, like retirement and a child's education, without any financial help. Not opting for loans to fulfil your objectives will help in breaking the cycle of living paycheck to paycheck and improving your financial future.

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To conclude:

Understanding your money and taking responsibility for your finances is important to stop living paycheck to paycheck. Remember that no amount of saving is too less. If you want to break this cycle, you should start cutting down your expenses, reducing debt, and investing towards a better future. Making a financial plan for your financial goals and future expenses is unavoidable if you do not want to live paycheck to paycheck in the future and create a debt that may take a significant number of years from your life to repay. With PersonalFN's personalized Financial Planning, we can help you plan any or all of your life goals, such as, children's future, purchase of an asset, retirement, debt management, insurance requirement analysis and other such goals. Through this Financial Planning Service, you get a holistic Financial Plan that takes into account your current financial position and tells you how to get to where you want to be with all of your financial goals. Moreover, you can choose to receive a Financial Plan for a single or multiple financial goals. You can also opt for only a review of your investments (mutual fund and insurance portfolio).

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.