Although I have been financially stable for years now, I still remember the days of being in that dreaded “paycheck to paycheck cycle”. I would get paid on a Friday and by Monday, my life would be on pause until I received another direct deposit. I had to pick and choose which bills I paid that month and deal with the late payments for the others the following month. Sigh. Those were NOT the days.
After I shifted my financial focus, created my monthly budget, established my emergency fund, and completed my payment priority list, there was one thing left to do- stop living in the dreaded paycheck-to-paycheck cycle.
“Living paycheck-to-paycheck” means that my monthly income equaled my monthly expenses and it was tough to handle financial emergencies because I had little to no money in savings. I would get paid on Friday and by Monday my life would be on pause until I received another direct deposit. I had to pick and choose which bills I paid each month and then deal with the late payments for the others the following month. Sigh. Those were not the days and I was determined to change my financial situation for good.
I created a 5 –step process that broke me out of that cycle using my financial education and past experiences. I have shared this process with my one-on-one coaching clients and they too have achieved great results from it. It’s not revolutionary by any means, but it works.
Step One: Determine Your Disposable Income Amount
Disposable income is the amount of money you have remaining after all your expenses are paid for the month. You can determine your disposable income by subtracting your monthly expenses from your monthly income.
For example, if you have a monthly income of $2,500 and your monthly expenses total to $2,000, you have $500 in disposable income.
Step Two: Temporarily Cut Your Monthly Expenses
This step is the most critical to ending the paycheck-to-paycheck cycle and attaining financial stability. You have to lower your monthly expenses in order to increase your disposable income amount.
Refer back to your monthly budget sheets from Section 2. Look at each expense category and identify at least one primary or secondary expense you can lower. Then, identify and temporarily cut at least two luxury expenses from the budget so you can accomplish financial stability quicker.
Tara’s Tip: Call your cell phone provider and express to them that you are on a budget and need a lower monthly payment or will be forced to terminate your service. If you use this exact line, they will most likely work with you to lower your bill about $20-$30 per month! This also works for cable and Internet providers. Give it a try… The worst thing they can say is no.
Pick a day to plan and prepare your lunch and dinner meals for the entire week. This will alleviate the cost of dining out several times per week.
Cancel your gym membership temporarily and find free at-home fitness solutions. Outdoor running and jump roping are great alternatives for cardio workouts. Browse YouTube and http://www.bodybuilding.com for strength training exercises using your body weight.
Get creative because there are many alternatives to help you cut down your expense categories.
Step Three: Assign Your New Disposable Income Amount a Financial Goal
Now that you have lowered your monthly expenses in Step Two, recalculate your disposable income amount.
Using the same example from Step One, you still have an income of $2,500, but you have lowered your monthly expense total to $1,750 a month. You now have a disposable income of $750 to help you accomplish your first financial goal!
Your first goal is to set enough money aside to pay for all of your primary expenses this month. Your next goal is to save $2,000 in your emergency fund savings account.
Step Four: Revise Your Monthly Budget.
Now that you have lowered your expenses, you need to update your monthly budget to reflect the great work you have done.
Step Five: Increase Your Income
Now that you have temporarily cut luxury expenses to increase your disposable income, it is time to increase your monthly income to increase your disposable income even more!
There are many ways to increase your monthly income, including the three suggestions I provide here.
Question: How has living paycheck to paycheck hindered you in the past? What did you do (or plan on doing) to change your financial situation? You can leave your response in the comment section below.
