How To Stop Living Paycheck To Paycheck
How much do you need to stop living paycheck to paycheck? And why financial security is so hard to attain!
- Lifestyle-Driven Savings™
- Ivy, LyfStyled
What is Financial Security
When it comes to money decision, we are all dealing with different circumstances and we make our decisions based on our experiences. This also means that, financial security means different things for each and every one of us. To create a level field for this discussion, let’s use a simple definition and say that:
Financial security is having enough financial assets to cover your expenses, emergencies and retirement without having any concern of running out of money.
A recent report by Bankrate reveals that the average American needs to earn $233k to live comfortably. But according to the US Census Bureau, the reality is that the average American only earns $75 203 per year. There’s a gap between what people need and what they currently earn.
The report also revealed that 72% of Americans say that they feel they are currently not financially secure. What’s sad is that 46% of American’s feel that they will never be financially secure.
In this post I will go through
– How was the GAP created?
– Ways to minimise this gap?
– Stimulus & sub sidies
How the expense to income gap was created
During the COVID pandemic
- Tons of layoff: As per the House subcommittee, America’s largest employers laid off more than 100 000 workers during the COVID pandemic.
- Government stimulus cheques, student loan repayment break: The US government spent over $1.8 Trillion on stimulus and subsidies on individuals and families. Of this, $817 Billion were given out as stimulus check and $39 Billion was spent on delaying student loans.
- Increase cost of long term health issues: A lasting result of the COVID pandemic is the long term costs on health that most American experienced. With some health care costs still being paid off currently.
These are some of the factors that fuelled the decline of household incomes while increasing the cost of living for most Americans.
Post pandemic
- No more government stimulus check and have to pay back student loans
- Health care costs: A report issued by the CDC, showed that the direct medical costs associated with Post COVID 19 conditions where 1.82x higher for child cases and 1.69x higher for adult cases.
- Inflation and increased interest rates on debts including credit card debt: Post COVID pandemic, the US experienced a sharp increase in inflation. This mean that the FED had to use measures such as hiking interest rates, this then meant that the large majority of Americans suddenly had ballooning debt to pay off. From mortgages to credit card debt and student debt loans that resumed payments.
- Wage not increased
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How to minimise the cost to income Gap
Biggest need is housing.
o If renting, consider moving to a smaller space if possible to decrease the rental costs
o Mortgage, consider fixing your interest for on the mortgage for a period and then refinance when the rates are lower. Fluctuation of variable rates creates instability.
Wants vs Needs
o Adapt to change in order to survive.
o Old budgeting advice would say you should spend 50% on Essentials, 30% on wants and 20% on Saving or Paying off debt. This does not work anymore especially because wages have remained stagnant while inflation has increased expenses.
o Need to reallocate and change your budgeting ratio
Combat higher interest rates
o As mentioned earlier, change in interest rates from variable to fixed to create stability. Because you can refinance once interest rates are lower
o Consolidate debt, make sure that you only pay one creditor and not multiple thus lower risk of default
o Pay off the debts with highest interest rates first off ie credit card
o Don’t pay for monthly needs using your credit card.
How to stop living paycheck to paycheck & gain financial stability
- Sort out your income to increase your feeling of financial security. Take up bonus offers from your employer to build a higher pension fund for yourself.
- Automate your fixed savings (3months income or 3 months of monthly expenses). Use the LyfStyled Emergency Fund Calculator to help you determine how much funds you need at any stage of your life. Make sure your debt (debt, auto, mortages) is not at any point higher than your emergency savings
The bottomline is that, learning how to manage your money across a range of financial products is no longer something only the rich and financially ambitious should do, we all need to budget inorder to maintanin our lifestyle.
It’s not what you earn but what you keep. It really has nothing to do with how much you earn but really to do with your ability to live within your means and spend way less than what you make.
Even after understanding the situation of living paycheck to paycheck, you may still have no idea of how to invest when the reality is that you are broke. Check this post out next.
