😵‍💫The Uncomfortable Truth why 64% of Americans Live Paycheck to Paycheck and 5 Steps to taking back Control

If you’ve ever been tight for money, with you and your bank account feeling like a skeleton until your next paycheck hits, praying you won’t get hit with some unexpected bill, you’ll know how mentally draining it is. You feel trapped, helpless and you become reliant on credit cards, meaning your pile of consumer debt will keep on growing. As if it’s not big enough. It almost feels like there’s no escape. You’re like a hamster on a wheel. Unable to stop. 

This has now become the reality for most Americans. 64% of them are now living paycheck to paycheck. This means all your money comes in and goes right back out again come the end of the month. This might not seem like the worst thing ever. After all, you’re staying on top of your bills, right? 

The real danger lies in the fact that there’s literally nothing leftover to go towards your future. Nothing to invest with and nothing to save on the side (read here why you must start saving now even if you’ve got nothing to save for). Having nothing to put aside for the future means that your money is not giving you security. How can it? When your entire paycheck goes to covering your bills. 

All you need is for one of life’s ugly moments (like your boiler breaking down – psst: those cost between £2-3k!) for your entire finances to come crashing down like a pack of cards. In that moment, since you’re unable to tap into any savings, you’ll fall into the debt trap. And by that point, it’s really really hard to get out of it. Interest payments builds and you’re struggling to meet that let alone your principal payments. 

The scary part is that this isn’t limited to the ordinary American. Rich people aka the high earners are being hit too. Read here why 36% of high earners live paycheck to paycheck!

Our salaries can’t keep up   

If you look at the stats, the amount our salary goes up by each year is kinda high by historical standards but the problem is that we’ve got to take into account inflation. Once that happens, you realise our salaries just aren’t keeping up with the higher cost of living.

This means that most Americans are forced to grapple with higher prices and start dipping into their savings which is not great but far better than tapping into your investments! But most people don’t have savings to dip into. 56% of Americans cannot cover a $1,000 emergency expense. Read here why you must start saving now even if you have nothing to save for!

Which means we just aren’t putting enough aside for a rainy day. Add this to the fact that interest rates are rising at the fastest in decades (at 4% now!) and it’s no surprise why more and more people are struggling. 

The higher cost of living is biting us all 

So as the cost of living only crept up, with groceries rising by 10% (or more!), the number of Americans living paycheck to paycheck jumped to 64% as of December, according to a recent LendingClub report.

When you compare the situation to 2021, 9.3 million more Americans said they are simply stretched too thin. And don’t just think it’s the average folk that are struggling. For the first time, more than half of all six-figure earners also said they were stretched too thin, a jump from 42% a year ago. 

Here are 6 steps to help you get out of the paycheck-to-paycheck rut and take back control of your finances and your future! 

#1 Dive into your spending 

Most of us have zero clue where our money is going. For those of us living to paycheck to paycheck our entire salary goes to paying our bills that there’s nada leftover. But get under the bonnet and check what it is you’re actually paying for. Read here why budgeting doesn’t have to be so boring!  

There will be plenty of areas  – like those sneaky subscriptions – that you can definitely cut back on. The average person has 12 subscriptions (millennials have 17!) so trimming this down can easily save you $150+ each month that you can then direct to your investments and savings to finally feel a little freer again. 

#2 Live below your means 

A lot of this living paycheck to paycheck is caused by living above our means. Our salary should technically cover basics like housing, food, clothes, travel ect with some leftovers for those lovely extras plus investing and saving for your future. If your salary can just about cover your bills, something somewhere has gone wrong. 

Maybe you’re living in a pricey area that’s way above your means or you’ve got a really swanky car that you bought 2 years ago but are still paying it off (plus interest!). This means your monthly bills expand until there’s nothing left. 

It’s not glam or fun to live below your means; living in slightly cheaper areas, renting smaller places, driving an older car (or no car!), not dining out so much ect but it’ll be worth it. You’ll be able to properly save and invest for your future. Making sure your older self has more than enough to go around. You want your savings to outlive you not the other way round! 

Live a little smaller now so you get to real real big later on. 

#3 The 50-30-20 rule 

A lot of this can be solved by following this simple budgeting rule:

Your post-tax salary is divided into 3 buckets:
50% – Needs (housing, food, utilities ect)
30% – Wants (shopping, travel, you name it!)
20% – Saving, investing and debt repayment 

As a broad measure, this will leave you with 20% of your take-home pay to build your future and get outa the race. It will leave you freer each month, allowing you to actually put money aside whether that’s for a rainy day or for your future. 

I love this method since it’s simple and easy to implement. Plus, it’ll straight away show you areas you’re way overspending on. If your “wants” bucket is way more than 30% of your salary, you know what to do! Read here how to put confidence back into your finances.

#4 Build your emergency fund  

Once you’ve done steps 1-3 you’re now ready to build your emergency fund. Think of it as your get-out-of-jail-free card. It’ll get your (and your finances) out of sticky situations and means you won’t have to resort to going into debt. With interest rates where they’re at now, and inflation squeezing us from every angle, that’s something we should all be avoiding. 

The peace of mind from knowing that if an unexpected payment crops up – which it will btw since this is life is messy and unpredictable, you’ll be able to handle it. As a basic level, you should have at least $1,000 in such a fund. Keep it in a high-yielding savings account that you can access at any point. Once you’ve got that, you can slowly start increasing it to 3-6 months worth of your salary and eventually 12 months salary. 

It sounds like a lot and in a way it is, but you chew at it each month rather than try to swallow it in one go. Set aside a little each month that goes to this fund. That’s all it takes. Little steps. 

#5 Drop that debt 

Debt holds us back. It’s debt that drains our money, stopping us from building for our future. Debt means we’re funding yesterday’s fun, today. It means we’re paying off that summer vacation we took months ago, in the dead of winter. 

Debt keeps you behind. It stops you from investing for your future since you’re always paying off your past. It’s a nasty habit but one that’s all too easy to slip into and before you know it, you’re now spending so much of your salary paying that off (interest and all) that you feel stuck. Read here

First off, don’t take on any new kind of debt! Put down your credit card. If you can’t afford to buy it twice you can’t afford to buy it once. Credit cards aren’t free money – it’s your money plus a hefty price tag attached to it.

Next, start paying off your debt. There’s so many ways to do this but it’s personal. You gotta find what works for you and you only. Some like to pay off their smallest debts first to give that feeling of success early on. Others like to bundle their debt into one pile and chew at it. 

Whatever your style, as long as you pay that debt off! You’ll feel free as a bird. 

Now go and take back control! 

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment