Even if you’re considered middle-class there’s still a good chance you’re living paycheck to paycheck. A whopping 47% of Americans say they would have to sell something or take on debt to cover an unexpected $400 purchase. FORTY. SEVEN. PERCENT. That means almost half of all Americans are living paycheck to paycheck, and many of them are millennials. In fact, almost two-thirds of millennials say they don’t feel financially secure and are living paycheck-to-paycheck.
A quick scroll through Instagram will show you a far different economic landscape though. Young people are taking vacations, buying houses and new cars, doing try-on hauls of all of the new merch they just bought, and photographing all of it on the latest iPhone. Alongside these lavish lifestyle posts are other “activism” posts about crushing student loan debt, and how evil corporate America is.
While there is massive room for improvement on many fronts when it comes to economic equality, the inability for middle-class Americans to look inward at how they are contributing to their own financial situations also has room for improvement. It’s easy to blame others (like corporations) for their irresponsible spending when times are tough, but how responsible was your spending before the pandemic? If you’re mad about the airlines getting a second bailout after squandering their profits over the last 10 years, but you bought a new car, found a chic new apartment, and have been getting your nails done weekly while neglecting to contribute to an emergency fund, I hate to break it to you but you have the same spending habits as the airlines.
The mental anguish that comes from wondering if you’ll have enough money to pay your bills can’t be minimized, but much of middle-class America would be able to break themselves out of the paycheck to paycheck cycle if they got honest with themselves about their poor financial habits. These are 3 of the worst money habits of the middle-class and how you can change them to break out of living the paycheck to paycheck lifestyle and start living your dream life.
1. You Don’t Know Where Your Paycheck is Going
Your Current Habit
Many middle-class Americans are spending plenty of money but have no idea what they’re actually spending their money on. Being comfortably in the middle-class affords someone the benefit of being able to pay their expenses, and have some extra money leftover. The problem is where that extra money goes. $100 gets spent on a night out. Your coworkers went out for lunch so you joined them. Your friend is getting married, so you “need” a new outfit for her wedding. And before you know it, all of your money is spent and you’re waiting on your next paycheck to get deposited so you can pay your rent.
Your New Habit
You can’t fix what you don’t know. If you want to fix your problem of living paycheck to paycheck, you need to get clear about where that paycheck is going. The truth is that money is simple. It is all about the money you have coming in vs the money you have going out. The key is to have more money coming in. Wealthy people know this so they spend less than they earn, and invest their extra earnings so they can make even more money.
To make sure you have more money coming in and can start making your money work for you like the wealthy do, you should know how much of your paycheck is used to pay for your necessities like rent, electricity, food, etc., and how much is left over after all of that is paid. You have two options when it comes to what to do with what’s leftover. You can spend it on unnecessary items, or use it to build your savings and investments. How you choose to deploy your leftover earnings will determine if you’re able to break the cycle of living paycheck to paycheck or not.
2. You Spend Money You Don’t Have
Your Current Habit
If you’re fake rich now, you’ll be real poor later. Buying stuff to look like you have it financially together and are already in the income bracket you aspire to be in is exactly how you got yourself into this mess. How many times did you really “need” to add that extra pair of shoes to your Amazon purchase, or buy the latest Urban Decay Naked pallet?
While it is super fun to treat yo’ self, if you’re using debt to fund your excessive lifestyle you’re only making your problem worse. Racking up credit card balances to buy things you don’t need and can’t pay off that month can get really expensive really fast. Credit cards have some of the highest interest rates of any form of debt, so maxing them out could leave you paying tens of thousands of dollars in interest. Adding on multiple car loans, and an expensive mortgage to that makes it even harder to break yourself out of living the paycheck to paycheck lifestyle.
Your New Habit
Debt should never be used to buy things that won’t appreciate in value. Bad uses of debt include excessive spending on your credit card to the point that you can’t pay your balance off in full every month, taking out car loans, or using a personal loan to pay for your wedding. All of these types of debt just leave you paying more for the items you’re purchasing.
Instead of using debt to fund a lifestyle you can’t afford, start using it to make your money work for you. Only spend the amount you’re able to pay off every month on your credit card. This allows you to avoid excessive interest charges, build great credit, and on top of that, your credit card usually offers extra perks like the ability to accumulate points for your purchases that you can use later to buy other things.
Using a mortgage to buy an income property, or a home within your budget are also good uses of debt. Taking out a personal loan to refinance high-interest debt like credit card debt is another great way to use debt to make your money work for you. By reworking your relationship with debt and using it to build wealth instead of fund a lifestyle you can’t afford, you’ll be able to make your money work for you instead of against you.
3. You Succumb to Lifestyle Inflation
Your Current Habit
Every time you get a raise or a new job that pays you more, does your extra money somehow find a way to disappear? That is lifestyle inflation. When you increase your expenses as your income increases. Maybe you find a cooler apartment that’s a few hundred dollars more a month or buy a new car or start going out for drinks more with friends. Whatever it is you enjoy, you just start to do more of it with your extra income and continue the paycheck to paycheck lifestyle.
Your New Habit
Start paying yourself first. This means that you take a portion of your income and use it to create financial stability (saving) and generate wealth (investing) for your future self. By paying into your own accounts first, you are setting up future you to be able to live the lifestyle you aspire to have and are currently faking.
Saving 3-6 months of expenses and starting to invest can seem daunting, but the easiest way to do it is to automate the process. To do this, you just need to set up automatic contributions to your emergency fund and investment accounts that get deposited each time you get paid. This prioritizes saving and investing in a way that doesn’t take up any of your time, and requires almost no effort!
This step is absolutely pivotal in whether you will be able to break the cycle of living paycheck to paycheck or not. Having a savings that you can rely on for unexpected expenses, or if you lose your job gives you financial stability, and investing sets future you up to be able to comfortably live the lifestyle you’re trying so hard to right now.
Fake it ‘til you make it just doesn’t work when it comes to money. If you’re living paycheck to paycheck, at best you’re spending all of the money you’re currently making, and at worst, you’re going into debt to pay for the things you can’t afford. Learning what you spend your money on, how to use debt to build wealth, and how to prioritize saving and investing will move you from living the paycheck to paycheck lifestyle to living your dream life.