Living paycheck-to-paycheck has never been easy, even in the best of time, but in these times of the coronavirus, it can become painfully sobering.
Two months ago, I met a friend who told me she was going to South America for two weeks and she was going to put it all on her credit card, where she already had an outstanding balance. I wonder how she is doing right now?
I have another friend, who is almost 50 years old, who is still paying her student loans. Of course, she has a new iPhone and she travels twice a year; one time to visit her parents, and one time to enjoy some time with her boyfriend.
It’s not just the poor
Most of the cases of living paycheck-to-paycheck are not cases of socioeconomic misfortune, not even of lack of opportunity. Both of my friends have full-time jobs with average salaries, they are intelligent individuals with regular jobs. They are cases of lack of judgment.
These friends are always spending a bit beyond their means. It doesn’t matter whether they make a lot of money or very tittle, they are always a few dollars in debt.
One of my friends said to me:
You know Alain, things have always worked out for me. I am willing to take my chances.
This is the same friend who’s income is decreasing and now finds herself making unprecedented sacrifices. She hasn’t been able to pay for a few unexpected home repairs.
What is living paycheck-to-paycheck?
Someone living paycheck-to-paycheck has no savings and are exposed to great risk. Everything has to work out just right for them to sustain their lifestyle. One day sick, on a small accident, one unexpected expense could derail their whole life.
In emergencies, such as the coronavirus, which no one could have predicted, the paycheck-to-paycheck lifestyle falls apart, and those people find themselves in very difficult situations, getting into deeper debt and asking for help from family and friends.
We might be tempted to believe that this is exclusive to people who have low wages, but that is not the case. Recent studies have shown that about 25% of families making $150,000 or more, also fall into this cycle.
High earners, increase their spending as their salaries increases. This is called lifestyle creep. As they earn more money, they find it easy to justify higher expenses.
What’s the solution to get out of the paycheck-to-paycheck cycle?
The key to getting out of this cycle is saving.
- Above all, cut credit card debt. I know people who play the credit card point game. They feel that they are winning, but they are not, they will lose at the end. Just don’t have any debt on your credit card.
- Then make sure you have some cash for an emergency. I mean real paper cash in your drawer or someplace when you could have it at hand. We are moving towards a digital society, but having some cash at hand can be very useful in times of emergency. Whether it’s $100 or $1,000 or a couple of thousands, that depends on your level of comfort, but cash is nice.
- With time build an emergency fund of three months. This fund must be in an accessible checking account. I have always been wary of cash not invested, but I have changed my mind over time.
- Start saving for retirement. Set a regular amount or a percentage of your income and put it away each month.
Getting our of the paycheck-to-paycheck lifestyle is possible. Don’t consider going on vacation, a new iPhone, designer clothes, restaurants, or other nonessential expenses until you have built an emergency fund and until you have created a regular saving plan.
My situation
I always keep some paper money in my possession and in my bank I have the equivalent of about four-month emergency fund. I hope I don’t have to spend it all on this coronavirus crisis.
What’s your situation?
Do you have any emergency fund? Are you planning to have one after this crisis?
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