By Craig Erwin, Ph.D.
It’s tough for many of us to make ends meet, with the prices of nearly everything climbing fast. This year is especially challenging, but, even during the best of times, many people live paycheck to paycheck. If they were to have an unexpected medical or car repair expense, many would be unable to pay their bills.
Even now, some homeowners with adjustable rate mortgages are surely struggling, as rapid interest rate hikes have increased their mortgage payments; some might even be at risk of losing their homes. How long could you keep paying your bills if you lost your job? You might think that only people living below the poverty line live paycheck to paycheck, but people of all kinds do. A joint study by PYMNTS and LendingClub found that 61% of U.S. consumers live paycheck to paycheck. Whether they are wealthy or poor, most people spend everything they make, unprepared for financial setbacks and failing to prepare for retirement.
Why do people live from paycheck to paycheck? Some have little choice. Perhaps they work for minimum wage or have multiple part-time jobs. Many barely make enough money to cover living expenses. Others may have jobs that pay much better than minimum wage. They should be able to cover their expenses comfortably and save money, but instead many spend everything they make. Often they are trying to keep up with the Joneses. If their neighbor buys a new Lexus, remodels her house, travels to Greece, or sends her kids to pricey, private schools, they feel compelled to do the same.
If you live paycheck to paycheck, you are at risk of having everything collapse like a house of cards. But it also poses big risks for your future because, when you live paycheck to paycheck, you probably aren’t saving money for college or retirement. Although paying for college is optional, paying for retirement is not. If you reach retirement age without having saved any money, you will probably have to work until you die. That’s a high price to pay for keeping up with the Joneses.
You must break the vicious cycle and develop better financial habits. If it’s possible, do what you must to stop living paycheck to paycheck because the short-term and long-term costs and risks are great. First, create an emergency fund that you can draw on if you suffer a financial setback. Second, create and stick to a budget to help you use money more wisely and avoid frivolous expenses. Third, cut expenses, wherever possible. Fourth, if you’re not saving for retirement, start now. Contribute as much of your paycheck as possible to a retirement savings plan.
For many households, living paycheck to paycheck is not a choice, but it may be possible for you to break the cycle. Do it now. Stop spending and start saving. It could help you avoid financial disasters both now in the future.
Are you living paycheck to paycheck? If so, can you stop spending and start saving? Are you saving enough for retirement?
For more information on budgeting, spending, investing, and retirement, click on the following links:
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