Living paycheck to paycheck is stressful. If you encounter an unexpected expense or a cost of living increase like a rent hike you might not have the money you need, and it’s also harder to save towards your financial goals. As a CPA, I’ve seen people who earn from $30,000 to $300,000 live paycheck to paycheck. In fact, about half of Canadians are now in this situation. I’ll walk you through how you can break free from the cycle, but first, let’s look at the reasons why you might be in this scenario.
Reason one: Your money story
Growing up, our parents might not have talked about money. Unfortunately, this lack of financial education leaves us unprepared to manage financial responsibilities. Or maybe you faced financial hardship and watched them struggle to make ends meet. Money can become associated with stress and anxiety, which can make us hesitant to manage our finances. We might also pick up money habits that work against us, like therapy shopping or impulse spending, which can spiral into consumer debt. The need to pay bills, combined with high interest rates, can make it seem impossible to get ahead.
Think about how your past shapes your relationship with money. Once you understand the root of your financial habits, you can begin to reframe your money story to serve you.
Reason two: Numbers put you off
Numbers can be intimidating and this fear can prevent you from understanding your spending habits. Without tracking your income and expenses, it’s easy to lose sight of where your money is going. But at the end of the day, you don’t have to be a math genius to deal with your finances! There are tons of resources out there to help you track your spending, including apps and spreadsheets.
Reason three: Lifestyle inflation
Even if your income increases, you might still find yourself strapped for cash. This is often due to lifestyle inflation – when your spending increases along with your income, leaving you with little to no savings. Many people with six-figure salaries still live paycheck to paycheck because while they know how to make money, they’re also tempted to buy nicer cars, move to bigger homes, or go on extravagant vacations.
If you start with a $40,000 salary and have annual expenses of $40,000 – you’re living paycheck to paycheck with no savings. Now suppose that you get promoted and you earn $60,000 a year. If you can maintain your existing expenses, you can save $20,000 a year. However, if you fall prey to lifestyle inflation and buy a nicer car and move to a bigger place, your annual expenses can easily rise to $60,000 and you will be exactly where you started. It’s natural to want to improve your quality of life, but without clear financial goals it’s difficult to save for the future. So how can you break free from this cycle?
Step one: Start with your ‘why’
Before making any major changes in my life, I always identify my ‘why.’ What is my reason for wanting to make this change and how will it help me stay motivated? As Jen Sincero puts it in her book You Are a Badass at Making Money, “When you have a strong ‘why’ you don’t need a whole lot of ‘how.’” For example, if you dream of being a homeowner one day, this is your why. Next, set a SMART goal that is specific, measurable, achievable, relevant, and time bound. Instead of saying, ‘I want to save money’ say, ‘I want to save $115,000 in three years for a down payment on a house.’ When you frame it like this, you turn your abstract desire into a concrete plan.
Step two: Invest in yourself
Learning how to manage your personal finances is essential to achieve financial freedom and investing in your financial literacy will pay you dividends. There are so many great learning resources out there, including free ones like YouTube or reasonably priced books by financial experts. Investing in yourself mostly requires your time and commitment, which is within your control.
Step three: Manage your money
Establishing a realistic monthly budget that includes all your income and expenses will help you see exactly where your money is going. Creating a budget will also help you understand your spending habits, which will help you make more informed financial decisions. For example, if you set a restaurant budget of $100 and spend it with friends in one week, you will know that to stay on track with your financial goals, you will need to decline invites for the rest of the month.
Tracking your spending helps you stick to your plan and be accountable to your goals. This habit, along with identifying your ‘why’ and investing in your financial literacy, will support you to break the cycle of living paycheck to paycheck. Want to learn more? Check out this video.
Disclaimer: This article is not intended as financial advice, and you should not make financial decisions based solely on the information presented.
Gabrielle Chung, CPA is the founder of Balance and Wealth CPA. She is also the creator of the YouTube channel @GabrielleTalksMoney, which aims to help young professionals and millennials achieve their money goals.
