When you live from paycheck to paycheck, you are constantly scrambling to make ends meet or running out of money before the end of the month. It can be stressful because you feel like you never have quite enough to cover all your bills — and buy those things you need or want each month. When you live from paycheck to paycheck, it is nearly impossible to get ahead financially. You might not be able to handle even a KES 10,000 emergency. Often, you end up overspending and running up more debt each month.
If your employer is paying you with a prepaid debit card, it may be even more difficult to stop living from paycheck to paycheck, but it can be done. These steps can help you start thriving financially so you can begin reaching your financial goals
Learn to Budget
The biggest thing you can do is to learn to budget effectively. Anyone can write down a monthly budget. However, writing down a budget and living on it are two totally different things. When you budget effectively, you track your spending and you stop spending when you run out of money.
A budget that actually works has all of your expenses built into it so that you will not be surprised when your car registration and taxes are due, or when you have to pay your insurance premiums. It also helps you deal with fluctuating bills, such as higher heating bills in the winter and higher air conditioning bills in the summer.
This is the biggest step you can take to stop living from paycheck to paycheck. It can also help stop you from having periods when you go crazy with spending and end up blowing all of your money for the rest of the month.
Cut Back on Your Spending
Once you have established a working budget, you need to cut back on your spending. This will free up money to help enable you to get out of debt and you can put it into an emergency fund. Once you pay off your debt, you will have more money to spend each month. The challenge in the beginning (when you have more cash in the bank) is to find ways to save in nearly every category (from food costs to entertainment to family vacations). As you get better at saving, you will be able to find even more ways to save.
The key to cutting back is to challenge yourself to spend KES 2,000 less per week on groceries or an amount that is line with your budget. If you work on cutting back in increments, it is more manageable and you are more likely to be successful. Instead of completely slashing one category, try reducing spending in several categories by as little as KES1,000 or KES2,000 a month. These extra savings will add up quickly and you can try to cut back more the next month.
Set Money Aside Each Month
The best way to stop living from paycheck to paycheck is to have money in the bank. You can do this by taking money out of each paycheck. For your initial emergency fund, you should have one month’s paycheck in the bank.
Once you’re out of debt, you can begin building a larger emergency fund. For instance, take 10% or 20% out of each month’s paycheck for your emergency fund. This emergency fund is the key to stop living from paycheck to paycheck in the long term. When you have a year’s worth of expenses in the bank, you feel better equipped for life’s unexpected challenges. Even if you start with just KES2000 per paycheck, you will start to feel more confident about managing your finances.
Just be sure you don’t dip into your savings once you begin setting it aside. If you know that you will be tempted, consider making it harder to do this by opening an online savings account or putting the money in a separate bank. If you know that it will take two or three days (or an extra trip to a bank) to access the money, it can help curtail your impulse purchases. You should also consider putting some money in an account that you can’t touch at all, like a three-month CD.
Get Out of Debt and Stop Using Your Credit Cards
Another thing you can do is get out of debt. Your debt is eating up a portion of each paycheck and can hold you back from doing the things you want to do the most. Logically, you won’t get out of debt if you continue to use your credit cards. You need to stop using your credit cards until you are completely out of debt, even if you believe the rewards are worthwhile. This will help you to control and monitor your spending. If you lack willpower, cut up all of your credit cards but one, and put all of your credit on that — and pay it off each month, no matter what.
While you’re doing this, avoid taking out a car loan or other types of loans until you have paid off your debt completely. Your emergency fund can help you pay for car repairs and cover other unexpected expenses so that you no longer have to rely on credit cards to get out of a tight situation. If you want to speed up paying off your debt, you may want to take on a part-time job. Take all of the money you make from that job and put it toward paying down your debt. Once you are debt-free, maybe you can quit your second job and be in a better financial situation.
Don’t Rely on Bonuses to Get By
When your company offers regular bonuses, you may begin to rely on your bonus as part of your budget. Because this is not guaranteed income, and your company can stop giving out bonuses at any point, you should never rely on your bonus to cover your expenses. Instead, you should create a spending plan for your bonuses. You can use them to pay down debt more quickly or to increase your emergency fund.