Many of us at some point in our lives have been in the situation where we've ended up spending all of our money for the month, left to hang on until next month's paycheck arrives. And it's not just something that happens to people on lower incomes. Individuals earning $30,000 per month can end up in the same dilemma as someone earning $3,000 per month, since those earning more also have increased expenses (and sometimes beyond their means).
Interestingly, an Ernst & Young survey asked 5,000 people about their saving habits and found that 17% of Australians would struggle to find $500 to $1,000, whilst a further 30% had no money left over to put aside for savings each month. Although 40% said they were able to pay their normal monthly expenses, surprisingly a third disclosed their concern about the ability to do so every month. If your situation falls into the latter, or perhaps you know somebody who does, then learn how to break the paycheck-to-paycheck cycle with the following pointers.
What happens with most of us is that we put off bills until the money lands in our account and we will constantly balance these bills with our money coming in. However, this is not a healthy relationship to have with money, because if you ever have a financial emergency you could find yourself being left between a rock and a hard place. The importance of breaking this cycle can lead to a healthier and happier experience with money and bills, but in order to achieve this, you need to try and put the following guidelines into place.
What are your Monthly Expenses?
If you have already created an effective budget and know what your outgoings are each month, then this part can be easier to complete. If you haven’t, then the first thing you need to do is add up all of your bills and mandatory expenses over a typical month. This calculation will help you determine your 'Paycheck Buffer' amount or the remaining amount you can potentially save each month.
The list you create should typically include things such as rent / mortgage, utilities, phone, internet, TV, groceries and any other payment that can’t be delayed for more than three days.
Most of us out there may find that after completing this exercise, our bills consume the majority of our monthly income and that’s fine. This exercise is aimed at giving you a very clearly understanding of your financials, so that you can begin to save properly every month as well as knowing when you're dipping into money you don’t ‘need’ to spend, but would like to.
Allow Income to Roll Over
Now, if you plan to stop living from payment to payment at the end of every month then you need to begin spending less than you earn. As simple as it sounds, for many it’s quite difficult to follow this basic financial truth. Once you figure out that it's entirely possible to live like this, the good news is that you are well on your way to breaking the cycle.
Once you have managed to save money for your first month (it could be as little as $5 or as much as $500+), you need to let this money roll over into the next month. Better still, if you can put that money into a savings account connected to your main bank account, then do it every month. I would suggest that the ideal amount of money per household to aim to have in reserves is $2,000 (for small emergencies).
To reach this figure it's important to create yourself a set of saving milestones and then aim to meet them by adding the appropriate amounts to your savings each month, little by little. It could take months or even years, but the most important thing is that you must not touch this money by keeping it entirely separate from your monthly expenditure.
Living on Savings
Allow the necessary time to pass and when you have finally reached your desired savings target, put this money back into your main banking account and use it to pay your bills. You will instantly notice that your bank account is larger that it usually is and guess what, you’ve just broken the paycheck to paycheck cycle.
What you have done by saving a little every month is build up a buffer for your bank account so you don’t rely on 100% of your income every month to get by. Effectively you can look at it like living on last month’s income, so there is no need to wait for next month’s payment before you pay your bills.
This excess money should also give you peace of mind and hopefully show you the joys of what financial freedom can bring. The beauty of this model is it can also be used to help you work towards paying off debt, saving for the future, putting money into investments or working towards long term financial goals.