Nearly 8 out of 10 workers (78%) live paycheck to paycheck, according to a new survey from CareerBuilder.com.1 That's up from 75% last year, and it applies even to those making 6 figures: 1 in 10 workers making $100,000 or more say they live paycheck to paycheck.
"In working with many clients over the years, I have found that most people tend to spend their entire paycheck if it is available in their bank account, regardless of whether they are at a low/middle level or are highly compensated," says Marc Kodomatsu, a financial planner in Lake Oswego, OR.
If you're putting away adequate savings for your goals and you have a healthy emergency fund, living paycheck to paycheck isn't necessarily a disaster. But a quarter of Americans have no money saved for an emergency, according to Bankrate, and 20% have less than 3 months of living expenses in the bank.2
"The events in Houston are a stark reminder of the perils of living paycheck to paycheck," says Thomas Balcom, a financial planner in Lauderdale-by-the-Sea, FL. "For those folks who have flood insurance, they may not have the funds available to cover their deductible or tie them over until they return to work."
Breaking the paycheck-to-paycheck cycle takes discipline and a plan. Here's what top financial experts recommend as the best steps toward more financial independence:
Track your spending
Much of paycheck-to-paycheck spending is because you aren't paying attention to your outflow of money. Take 2 to 4 weeks and document every purchase, whether it's by credit card or cash. At the end of the period, you'll be able to see where your dollars are going—and you'll be more conscious of your overages. "Optimistically, performing the above process will change a person's cash spending habits and make each paycheck go further, so there are actually funds still left when the next paycheck arrives," says Sallie Mullins Thompson, a financial planner in New York City. "If this doesn't help, a more drastic approach may be needed."
Make savings automatic
If you plan to save "whatever's left over" after you spend the rest of your paycheck, you'll never put anything away. Whether you're building up emergency savings or putting money away for retirement, that money should come out first, ahead of the rest of your spending. Set up an automatic transfer on paydays from your checking account to the savings account of your choice, or sign up for your company's 401(k) plan to have retirement savings happen automatically. The more you can put on autopilot, the better.
Put savings elsewhere
If you're managing to save, make sure you're putting your dollars somewhere you can't easily get to them. "If you can easily transfer funds same day from a savings account to a checking account at the same bank, those funds will often get spent," Kodomatsu says. "Using an account that is not very accessible helps." That means an interest-earning savings account or money market at another institution if you can.
Take a hard look at your fixed expenses
Sometimes a paycheck-to-paycheck existence means you've locked yourself into a lifestyle you can't really afford. "The general rule of thumb is that your monthly housing expenses should be 28% or less of your monthly gross income," says Natalie Barber, a financial planner in Atlanta. "If you are outside of that range, you may want to consider moving to a less expensive neighborhood or downsizing or getting a roommate." The same goes for that luxury car: how would it impact your budget if you sold it and purchased a more economical vehicle?
Then turn to your want-to-haves
Many of your expenses are necessary—mortgage, insurance, food—but what's left over is more flexible. Try ranking your discretionary spending items from most important to least important. "If someone has a gym membership that costs $150 a month, could they sacrifice or compromise to a cheaper solution?" says Stephen Jordan, a financial planner in Peoria, IL. "If someone has a cable package that is $200 a month, could they get by with one that costs $50 a month?"
Save your raises
If you're truly locked into a lifestyle with no wiggle room, make it your goal to use raises and bonuses to sock money away, suggests David Mendels, a financial planner in New York City. Whenever you receive a salary bump, tax return, or bonus cash of any kind, use it to build up your emergency savings or bolster your retirement fund.
Choose someone to help you stay on track
"Working with someone to hold yourself accountable is probably the most important thing," Jordan says. He recommends working with an advisor, relative, spouse, or a trusted friend to increase your chances of success. "I compare this to working with a nutritionist or trainer to lose weight," he says. "It isn't really something that can be done over the course of 1 meeting."
Find your "why"
You must have a strong reason to change your habits. Are you saving toward a down payment on a second car that will make your family life easier? Or a down payment on a house so you can stop renting? "You must have a dream and a belief that you can make it come true," says Dana Anspach, a financial planner in Scottsdale, AZ and author of Control Your Retirement Destiny. "Otherwise, why cut the cable TV? You have to believe that making a small change now will lead to a better life."
Be patient with yourself
"Moving to a savings mind frame for someone who hasn't saved is similar to moving to a healthy eating lifestyle for someone who eats mostly fast food and sweets," Barber says. "It's hard to break habitual spending habits and even harder to have clients reflect on their emotions and feelings toward money. This usually isn't an easy fix."