Living Paycheck To Paycheck? Here’s How to Break the Cycle

Are you living paycheck to paycheck?

If your monthly budget is tight already, any recession or economic fallout will make matters worse.

Now is the time to break the paycheck to paycheck cycle and start building wealth.

For years, I’ve assumed most of my readers don’t live month to month.

But according to a recent survey, a surprising percentage of American’s are living paycheck to paycheck, even when our economy was booming.

In this article, I’m going to share my past struggles with cash flow and look at the causes and cures of living paycheck to paycheck.

Surprising Numbers

During the most recent economic expansion, which lasted 128th months and ended due to COVID-19, unemployment was consistently below 4%.

At one point, there were more jobs (6.7 million) available than people out of work (6.4 million). That never happened before.

This was great news for everyone as a rising tide lifts all boats. Of course, the longer it continued, the more likely it was that the expansion would end and we’d experience a recession.

Then, a recession started in early 2020.

Finding work when the economy is robust can be a tremendous opportunity, as I recently learned.

Yet, even in epic economic times, a survey found that 78% of U.S. workers were living paycheck to paycheck. That was up slightly from 2013.

I would have guessed a lower percentage. But readers have contacted me about this.

And followers on Facebook have commented about how some of my articles are meaningless to them because they don’t have any money left over to invest each month.

Living paycheck to paycheck is a huge problem.

A Cash Flow Conundrum

People living paycheck to paycheck have a cash flow problem. All of the money that comes in during the month goes out. They have little or no savings to their name and often have a negative net worth.

It’s why I recommend saving first, so you don’t spend it all.

Cash flow problems stem from low income and recurring payments beyond basic living expenses.

Excessive debt is a common cash flow killer. Debt payments pile on top of monthly living expenses — if you have too many, they’ll consume all of your potential savings.

My cash flow was suffering a few years ago due to a suffocating car payment and increased costs associated with having kids. I felt ill at the end of each month. The problem sneaked up on my blind spot when our family purchased a minivan.

When I diagnosed the problem and decided to make a change, I had to make some sacrifices.

One of those was eliminating the car payment from my life. The $563 monthly payment was killing our cash flow, but I justified it because the interest rate was only 0.9%.

Low rates are a trap.

A big chunk of our savings went toward the loan principal, and I focused on paying off the $12,000+ debt for months instead of spending or investing.

For the record, I never regretted buying a new minivan, only that I didn’t save enough cash for it.

I describe the problem in detail in an article called Cash Flow Suffering, Change Shit Up! from a while back.

The article offers a bunch of tips on how to break a cash flow conundrum if you’re suffering today.

My cash flow problem was minor compared to the 78% of people in that survey.

I was still investing pre-tax money into my employer-sponsored 401(k) and saving for college each month. But the balance of our monthly budget that was treading water.

As someone who always thought about personal finance and had a good salary, I still felt trapped.

Anyone who doesn’t pay close attention to their budget is highly vulnerable to a cash flow problem.

Why are so many People Living Paycheck to Paycheck?

So why do so many people live paycheck to paycheck, even when the economy is healthy? Well, I’m not an economist (if I were, I’d provide more data and less opinion), but three reasons come to mind:

• Behavior
• Low wages
• Increasing costs

Behavior

As the economy strengthens, more and more people are individually better off. When individuals earn more, they tend to buy more material objects. They typically borrow and spend more, not save more.

Big-ticket items such as a house or car are almost always purchased with borrowed money.

People who achieve newfound prosperity choose to maximize their buying power and purchase more expensive houses and cars than is necessary.

The loans associated with these larger purchases require long-term payment plans. Those payments crush cash flow. Add a student loan and some credit card debt to the mix, and monthly income vanishes.

A mortgage can be a helpful financial vehicle over long periods, but not if you overspend for a house.

This is, unfortunately, the American way. Financial bloggers are trying to change this mentality. Financial education plays a significant role in the ability to manage a monthly budget.

Low Wages

Despite the strong economy, not everybody is participating. Wage growth increased by 4.56% in April 2018 year-over-year. That’s below the average of 6.21% from 1960 until 2018,

But we know that wage growth is stronger in metropolitan areas but stagnant in many parts of the country.

Economists talk a lot about wage growth in a healthy economy because it’s part of the cycle. When the unemployment rate is low as it is today, employers have to pay more for talent, increasing wages.

But higher wage growth hasn’t happened yet in this cycle — perhaps because employers have a broader pool of workers to choose from thanks to the surge in remote working. Or maybe globalization or robots or some combination of many factors.

On an individual level, low wages stem from a lack of education. Education level is a powerful indicator of lifetime earnings amounts. However, the cost of attaining a formal education is out of reach for many people these days.

Low wages disproportionately impact people from disadvantaged socioeconomic backgrounds.

Not everybody gets a fair shot, making it more difficult to make ends meet.

Increasing Costs

Housing is expensive in big cities and wealthy suburbs. Exorbitant housing costs in places like San Francisco are well-documented.

In the Washington D.C. metro region, where I live, density is increasing while prices continue to rise. Even so, the price of my condo didn’t rise much until shortly before I sold it. Our single-family home in the suburbs has risen about 20% over the past nine years.

Life feels expensive. Maybe because in those nine years, I been providing for four other human beings.

With the economy strong, inflation is starting to pick up too. Inflation is the general increase in prices and the fall in the purchasing value of money.

It slowly makes stuff more expensive.

The Consumer Price Index (CPI), the metric most commonly used to measure inflation, rose 2.8% in the 12 months ending in May. The Federal Reserve’s target inflation rate is 2%. That’s one reason economists expect to see multiple rate increases this year (including this past Tuesday).

Rate increases lead to higher borrowing costs for everyone, which will increase the cost of living even more.

And let’s not forget about the rising cost of college and healthcare.

How to Break Free from Living Paycheck to Paycheck

It’s tempting to accept that you can’t save money because you:

• don’t make enough money
• can’t earn more
• have spouse/kids to support
• have too many student loans
• were slammed with medical bills
• or don’t have anyone to help you

All of that can be true. But that doesn’t mean you can’t make the sacrifices and changes needed to start crawling out of the trap. Escaping the paycheck to paycheck cycle requires a shift in mentality.

Spending choices are made every day. You might buy coffee, watch cable TV, eat out, or wipe your butt with premium toilet paper instead of a basic brand.

Each spending decision is a choice to consume more or save. One small purchase or premium upgrade may not seem like much. But hundreds of those every year make a difference.

When most people save a buck in one place, they turn around and spend it somewhere else. They still end up broke at the end of the month.

Worse yet, most people don’t have any emergency savings. So when something happens that requires money, debt is the only solution.

It doesn’t have to be that way.

In a previous article, I provided a bunch of concrete actions you can take to fix your cash flow problems and stop living paycheck to paycheck. Some ideas include:

• Do a budget, so you know where your money goes
• Building emergency savings, so you don’t end up in the hole when the inevitable occurs
• Change your Form W-4 to increase your take-home pay and decrease your tax refund
• Cut spending and pay off debts to reduce recurring payments
• Refinance your mortgage to lower your monthly payments
• Refinance or consolidate consumer debts for lower rates and payment amounts
• Temporarily decrease retirement contributions to free money to pay off debts

But the real secret to breaking free from the cycle is mental. Choose to break the cycle. Educate yourself. Then follow through.

We also make choices about earning. Forty hours per week may not be enough earning power to break out of the paycheck to paycheck cycle.

Second jobs are everywhere.

Side business opportunities are everywhere too. However, it’s easier to keep on living the same way without the motivation to break the cycle.

My day job is a 40-hour per week gig. I come home, maybe go to the pool, eat, and put the kids to bed.

Then I have a choice. Do I work on my side business to try and earn more? Or do I watch The Americans with Mrs. RBD?

4-5 nights a week, I choose extra work. This effort helped me escape an inadequate cash flow situation and now feeds my investment accounts, which earn me extra money every day.

Since I broke the cycle many years ago and again in recent memory, I don’t necessarily need the extra money or work. But I enjoy it, and it’s helping me to reach my goals sooner.

Conclusion – Are You Living Paycheck to Paycheck?

Reading that 78% of Americans are living paycheck to paycheck was an eye-opener, especially in such a booming economy. I’d be naive to think that my readers are immune to this statistic.

Though you may not be one of them, it can still sneak up on you as it did to me at age 41. Buy the wrong car or house, and your cash flow situation will be screwed shortly after.

We should also all understand that despite the strong and strengthening economy, not everyone is participating. People are still struggling, and when the next recession arrives, those living paycheck to paycheck will be most vulnerable.

Our job is to make sure it’s not us.

Photo by Steve Johnson via Pexels

Craig Stephens

Craig is a former IT professional who left his 19-year career to be a full-time finance writer. A DIY investor since 1995, he started Retire Before Dad in 2013 as a creative outlet to share his investment portfolios. Craig studied Finance at Michigan State University and lives in Northern Virginia with his wife and three children. Read more.