If you’re living paycheck to paycheck, the holidays can be a stressful time. There simply isn’t any extra money in your bank account.
A surprising number of Americans live paycheck to paycheck but for different reasons. For some, essentials like food, rent, car insurance and the expenses that come with children take every dollar.
But a recent study by the consulting firm Willis Towers Watson found that 18% of people earning more than $100,000 a year also spend everything they make between paychecks. Personal finance experts say spending on discretionary expenses is a major reason.
In the first example, people with modest incomes may find they must increase incomes with side hustles because it is difficult to cut spending, although some reductions might be possible. Upper-income households that barely make ends meet should focus on ways to cut spending.
You’ve got to have a budget
Taylor Kovar, a certified financial planner and CEO of Kovar Wealth Management, says the first step for any family is to create and stick to a budget.
“Track your spending to ensure you stay within this budget,” Kovar told ConsumerAffairs. “Identify areas where you can reduce spending. This might include dining out less, canceling unused subscriptions, or finding options for more affordable entertainment.”
“To do this, write out all of your recurring expenses so you know how much you have left,” John Owens, financial wellness expert and executive vice president at Monterey Financial, told us. “This can be everything from monthly water bills, to car payments, gym memberships to kids monthly school fees etc. You know these are consistent and going to happen monthly. From there you can see where the rest of your money is getting spent and can give yourself a spending budget in those categories.”
But it’s not always a case of additional spending that’s the problem. It can also be existing and new credit card debt that carries very high interest rates. Those payments have to be made each month, taking dollars that could be directed toward savings.
Debt snowballing
“Consider using strategies like the debt snowball or avalanche methods to systematically reduce and eventually eliminate your debts,” Kovar advises.
The debt snowball is a simple method of quickly paying off credit card debt. If you have three credit card balances, make the minimum payment on the two accounts with the largest balances.
On the account with the smallest balance, pay as much as you can each month until the balance is paid off. Then, use the money you were paying on that third account and apply it to the account with the second-largest balance. It may take some time but you’ll eventually be debt-free and have extra money for savings or an emergency fund.
Run it like a business
That’s what businesses do. A business that doesn’t make a profit has to borrow money to stay in business or to grow. Those are usually referred to as “zombie companies.”
But when business revenue covers all expenses and money is left over, that money is referred to as “free cash flow.” It’s money that can be applied to new projects or investments or returned to stockholders. For households. Free cash flow should be the goal.
“If you are constantly slugging and living a lifestyle you cannot afford, it will catch up with you,” Owens warns. “This includes eating out multiple times a week when you should be eating in and creating multiple meals off a good grocery run. Living below your means for a while can help you save some money.”
Photo Credit: Consumer Affairs News Department Images
Posted: 2023-12-19 12:38:04
