The percentage of people living paycheck to paycheck ranges depending on who’s surveying from 47% (Careerbuilder 2008 survey) to 71% (American Payroll Association 2008 survey). This issue isn’t unique to any particular income level — the Careerbuilder survey also shows 21% of Americans with $100K+ incomes living paycheck to paycheck. Whatever the actual percentage is, if you’re one of the people in the paycheck-to-paycheck boat, you know how challenging it can feel to change the situation.
If you’re determined to make this change, you have to do more than nickel and dime your emergency fund. More than the popular “save the change” program on your credit card (nothing wrong with this, it’s just not enough). The small things do add up, but it’s very slow and doesn’t really give you that sense of accomplishment most of us need to continue.
First, set a goal.
Ideally, you’d have 6 months’ of living expenses in an emergency fund. But for a true paycheck-to-paychecker, thinking about the ideal makes you laugh. So start with $1,000. Then when you get that, you can change your goal to one month’s expenses. Then three, etc.
Second, set a timetable.
Don’t give yourself a lot of time to save $1,000. You want a sense of urgency to achieve your first milestone. I’m not going to get specific here because depending on your income level, it might be reasonable to do it in one month or three months. But I wouldn’t suggest more than six months for anyone.
Third, pick 3 things on this list that you can do today.
1. Set up an automatic transfer from checking to savings on payday. Enough to be a little painful initially, but not so much that you can’t stick with it.
2. Take a one-month spending vacation. Don’t starve yourself or skip doctor’s appointments if you’re sick, but don’t buy anything that’s not absolutely necessary. Put everything you have left over in your emergency fund.
3. Have a garage sale (or sell your stuff on Craigslist, eBay, etc.). Some people can generate the $1,000 from this alone.
4. Use 3 paycheck or 5 paycheck months. If you get paid every other week, then there are 2 months a year when you have a 3rd paycheck. If you get paid every week, you have 1 month every 3 months with a 5th paycheck. Most people just kind of absorb this extra paycheck into their spending. Instead, make sure you’re living strictly on your regular number of paychecks each month, identify the months where you’ll receive an extra one, and put that money directly into your emergency fund on payday.
5. If you get a bonus, over-time, or extra commission, put it in your emergency fund.
6. If you get a raise, calculate how much extra you get on your first check after the raise, and increase your automatic transfer to your emergency fund by that amount. Don’t increase your spending.
7. Get a part-time job or start a small business (one without a lot of overhead) and save everything you earn from it.
8. Write down all of your expenses for an entire month. Pick at least two to eliminate or reduce.
9. If you’re part of the 21% of people earning more than $100K living paycheck to paycheck, when you max out on social security ($106,800 limit this year) and your paycheck goes up, put the extra money in the bank instead of spending it.
10. If the above aren’t enough to get you there, consider big changes like a less expensive car or place to live.
Fourth, write it down and show it to someone.
I will save $_______ by ______ (this date) by doing items 1)______________, 2)__________, and 3)____________. Your chances of success increase exponentially when you write your goals down and share them. Good luck!