All of us have had moments where we wonder how to pay a particular bill in a month. Or, we have watched the grocery store attendant ring up the items in the cart and then realize we grabbed more than we could pay for. Perhaps the car blows a tire, so we wonder how to get to work because we can’t afford a replacement tire.

To have the occasional “uncomfortably” low balance is one thing, but living moment to moment, without ever having a financial buffer, keeps some people living on a financial edge—paycheck to paycheck. If this describes you, then it’s time to make a change.

What Does Paycheck to Paycheck Mean?

The term means that if you lost your income, you would not be able to pay for living expenses in the immediate future. Despite common belief, anybody at any income level can live paycheck-to-paycheck. A high-income earner who chooses to live in a luxury downtown apartment that they can barely pay for may end up living on the financial edge.

In fact, year-end 2022 surveys by industry publications and LendingClub Corp indicated that up to 64% of Americans believe they live paycheck-to-paycheck.

Furthermore, things like inflation and cost of living surges that outstrip wage hikes may drive people to live on credit, which is not a healthy, peaceful, or long-term financial strategy.

happy couple going over finances together to create a budget to save money according to experts at tristar cpas in nashville tn

Steps to Stop Living Paycheck to Paycheck

So, what can you do to step away from the edge? Financial experts at TriStar CPAs in Nashville have identified some practical solutions to try. Here are six steps to a financial buffer that doesn’t include taking on additional debt.

  1. Assess.

    Does your monthly income cover monthly essentials such as housing, utilities, food, childcare, and transportation? If the answer is “no,” then there are two paths before you: either increase your income or reduce your expenses. If the answer is “yes,” then move to step #2, budgeting, to implement one or more savings strategies to build up a buffer.

  2. Budget.

    Develop a budget to help you say yes or no to your discretionary spending or demands that others, like children, family members, or coworkers, may place on your income. A budget clearly shows what you can and can’t spend each month.
    To set up a budget, record your monthly net income and prioritize your living expenses from most to least important. A good place to begin is to write down the cost of:

    • Shelter
    • Utilities
    • Food
    • Transportation

    From there, you can list all other necessary expenses in order of importance. Once you finish your budget, you will see how much money you have left over at the end of the month, if any. That amount left over is called discretionary funds.
    You have access to many free budgeting tools with a simple Google search. Zero-based budgeting is one of the better budgeting tools. It requires you to have zero dollars left over, or zero discretionary funds. That means you are telling where every dollar you earn will be spent. You are in total control of your earnings.

    Use your budget as a spending template and stick to it. Sticking to your budget is a discipline that takes time to establish. It’s difficult to say ‘no,’ but your resources are limited, and your first responsibility is to provide for the essentials of life. Your second responsibility is to provide a financial buffer for your family. Having that buffer is what will keep you from living paycheck to paycheck. With a good budget, you may build a buffer!

  3. Reduce Expenses.

    Review your monthly expenses. Is there an area where you could save on expenses? Reduce the cost of housing and groceries, and implement energy-saving strategies to reduce utility bills. Perhaps there’s a less expensive service provider for internet and cell phones. What can you live without for a time? Can you live with less for a time? Can you say ‘no’ for a time?

  4. Increase Income.

    You may decide to increase income by changing jobs, taking on a second job, or starting a side hustle for a specified time. It’s not forever, just for a time. If you have a strong desire to keep your current job, you can ask your employer for a raise or to move to a higher-paying position. Do your due diligence and search the job market for estimated salaries for your current position. This information may be leveraged for a salary bump.

  5. Pay Down Debt.

    Most of us have debt these days, and with rising interest rates, it can become toxic very quickly. Talk to your lenders. Tell them how you intend to pay down your debt and get them on board with your plan. There are several strategies to pay down debt (other than mortgage debt). Here are a couple that are easy to implement!

    • One strategy recommends targeting the debt with the highest interest rate and paying that balance down first.
    • Another recommends paying off the loan with the lowest balance first.
    • Both recommend you budget an amount to pay on your loans and then as you pay the loans off (by either method), the budgeted amount remains the same, unreduced. So, you continue to pay that budgeted amount toward other debt according to your adopted strategy.
    • As you reduce debt, you continue to pay that same budgeted amount until it’s all paid off. You can do this!
  6. Establish an Emergency Account.

    So, now you’ve reduced your expenses and may have increased your income, and you’re reducing debt. Deposit some or all of the money you’ve saved and the additional money you’ve earned into a savings account that will serve as an emergency fund. Maintain a $2,500 – $5,000 balance in this account. Use the funds in this account when that tire blows, or the radiator goes out, or to pay that unexpected medical bill. When the account drops below that minimum balance, return to items 3 and 4 to build it back up again. This is the first strategy to get off that financial edge of living paycheck-to-paycheck!

  7. Open a Savings Account (Optional—But Highly Recommended).

    If you decide to take this financial thing further, your next step will be setting up a savings account. There are many types of savings accounts, so discuss with your banker which type will be the best fit for you. Once you’ve opened up your emergency account, you’ll want to fund it with up to 6 months of earnings. That may seem like a lot, but this fund can be a cushion if you lose your job. The account should at least earn interest or be invested in mutual funds. Your money should work for you while it sits there and be immediately available to you when needed. As with the emergency fund, when the balance dips below the minimum level, return to items 3 and 4 to build it back up again.

happy young woman celebrating financial success after budgeting according to experts at tristar cpas in nashville tn

Celebrate Being Financially Sound

You’ll be off the edge and no longer living paycheck-to-paycheck once you establish your emergency fund and savings accounts. That’s a nice place to find yourself! Pat yourself on the back for all your hard work!

Bonus Points: Diversify Your Income

Some people take financial planning even further. Many may contribute to retirement accounts, purchase life insurance, and invest in income-earning assets to diversify their income stream. With this financial strategy, they are not totally dependent upon income from wages.

Enjoy Financial Security: Plan With TriStar CPAs

Living on the edge requires no planning, yet it is so stressful! Being intentional with your finances requires planning, discipline, and setting boundaries for yourself, your children, other family members, and friends. With this action comes some financial security, and peace replaces panic when those moments happen, as they always do! Take charge of your finances, set some boundaries, and get off the edge!

Want help taking your finances further and having even more financial security? Talk to an experienced professional at TriStar CPAs in Nashville! We can help you plan, budget, save for retirement, and more! Start a conversation with us to see how we can best help you reach your financial goals.