7 Ways to Break the Cycle of Living from Paycheck to Paycheck

(and eventually attain financial freedom)   

If your employer didn’t pay you your next salary, would you still be able to pay your bills? If your car were to break down tomorrow and need Kshs. 30,000.00 worth of repairs, would you be able to afford it? If your answer to any of these questions is, “not really,” you are possibly stuck in the cycle of living paycheck-to-paycheck – and you’re not alone. 

Not only is this an incredibly stressful way to live, but it puts you at risk for serious financial troubles if you end up needing money for something outside of your everyday budget. What can you do when you barely have enough to pay rent, let alone to invest or to contribute to your pension fund? And how do you break out of this cycle? 

Here are 7 actionable steps you can try and implement to break the cycle of living from paycheck to paycheck.   
 

Step 1: Start Tracking Your Spending

The main reason you should track your expenses is so that you can identify wasteful spending habits you may have. We mostly assume we know what we spend on, but once documented, you are likely to be surprised by how much you spend on smaller, seemingly insignificant items. Another reason for tracking your spending, is that, once you know how much money you spend, it’s easy to balance your income with your expenditure and avoid spending more than you earn. So, what are some ways you can use to track your expenses? 

 -You can use the old, tried and tested method of manually recording everything you spend down in a notebook. The advantage of this method, is that writing down the transaction causes you to be more conscious about your spending habits in the moment that you are. The disadvantage, though, is that It’s a hassle to keep manually recording, and there’s no way to retroactively collect an entry if you forgot to log it.

-Another way you can track your expenses, is to stop using cash altogether. If you use mobile banking apps and debit cards only, you will be able to look at the statements at the end of the month and see exactly what you spent your money on. This is less cumbersome than noting down, but may not capture items such as bus fare or the snacks you buy in the office. 

-There are also Budgeting and Expense Tracking Apps available in the market that can assist you keep track, but they also entail manually logging your transactions.   At the end of the day, how you choose to keep track of your spending comes down to your personal preference. The Important thing is to end up with a very clear picture of exactly where your money is currently going. You should track your spending for at least a month, but it is good practice to continue doing so for longer.    

Step 2: Cut Down Your Expenses

Cutting down your expenses may require you to make some sacrifices if you are determined to get out of your current cycle. 

Here’s how you can cut down on your expenses:

• -The first thing to do, is to cut out all the obviously unnecessary expenses you noticed while tracking your spending. You may have realized, for example, that you are subscribed to more streaming services than you require, or that you are paying for a gym membership you aren’t using.

• -Next, In the first couple of months of this process, you may have to keep your expenses to mostly needs and as few wants as you are able to endure. Any extra income you can spare will come in handy later, especially if you have debt you want to reduce or eliminate.

• -You can also opt to Downgrade some of the services you pay for. For example, you could downgrade your cable service to a cheaper one with fewer channels.

• -Learning to be a prudent shopper is another way you may be able to cut down on your spending. For example, when doing your grocery shopping, do price comparisons and opt for affordable brands.

• -If your expenses are extremely high, you may consider looking for cheaper accommodation. Rent alone may be taking up a large chunk of your income.

Step 3: Create and Follow a Budget

By this step, you have tracked your spending and reduced your expenses. Now you need a plan to make sure that your money is going where you want it to. No idea where to start with your budget?

 Here are some tips:

• -Start with the most important items first. This is items such as loan repayments, rent and utility bills. For the bills, use an estimate amount that is equivalent to the average amount the bills usually come to.

• -Be realistic with your budget. This will save you the frustration of always ending up overbudget.

• -Include entertainment in your budget. Budgets are not intended to feel restrictive – they are only meant to guide you on how much to spend on what.

• Create a buffer in your budget. This is an extra amount intended to account for any unexpected cost overruns that may occur during the month. If there are no overruns, this amount goes to savings!

• -Budget for Saving. You should include an amount in your budget intended for saving.

Step 4: Prioritize Saving

Once you have a budget in place, you should be able to start saving. You may start small at first, just to get yourself into the habit, and then gradually increase your saving amount. And how do you prioritize saving? 

PAY YOURSELF FIRST!

 Automate if possible. The one sure way to ensure you don’t spend the amounts you have decided to save, is to have it leave your account before you can access it. Ideally, this should be done by standing order into a different account to remove the temptation of spending it.      

Step 5: Start Building an Emergency Fund

An emergency fund is basically just money you keep aside in case an unexpected expense should come up. Emergency funds create a financial buffer that can keep you afloat in times of need so that you avoid having to resort to credit cards or high-interest loans. It is recommended that your emergency fund be equivalent to at least three to six months’ worth of your expenses, so it is definitely something you will have to build up to. 

So how do you start building this fund?

• -Calculate the size of the fund you require. This should ideally be 3-6 months of expenses, or for ease of calculation 3-6 months’ worth of salary.

• -Next, Set a monthly savings goal and a timeline. Based on how much money you can afford to spare every month; you can set a time within which you plan to finally have built your fund. It doesn’t have to be instantaneous. You can build it over years. The idea is that your emergency fund will be gradually growing every month.

• -To build up the fund faster, top it up with any bonuses you may receive. This while definitely reduce the time within which you can achieve your fund goal.

• -Ensure the fund is in a difficult to access place. That is, keep it in a different account than your transactional account.

Step 6: Manage Your Debt

Elimination or reduction of debt is a whole topic on its own! Debt is one of the main reasons we find ourselves stuck in the cycle of living from paycheck to paycheck. But once we have managed our expenses, are following a budget and we have an emergency fund to cater for the unexpected, we are better able to get our debts under control. 

So, where should you begin if you want to manage your current debt?

• -List all your debts. This list should include the amounts outstanding, and the interest rate for each loan.

• -Eliminate the higher interest loan debts as soon as possible. These are debts such as credit card debt, or short-term mobile loans.

• -Avoid missing repayments. The penalties on late payments are often high and tend to compound with time.

• -If your debt load is overwhelming, find out from your lender if you are able to consolidate any of your debts at better terms

• -Avoid borrowing unnecessarily. Develop a habit of not borrowing for the purchase of consumer goods, for holidays, or for day-to-day activities. 

And finally, Step 7: Increase Your Income Streams 

If you are able to earn additional income other than your salary, it reduces your reliance on your pay slip and creates more opportunities for savings. No additional income is too small to make an impact on your finances. Ideally, this additional income should be passive - do not let side-hustles take up too much of the time and energy you need for your job. Your job is currently your main hustle! Don’t lose the bird you have in hand chasing for the two in the bush.

So, to recap, the 7 steps you can take to break the cycle of living from paycheck to paycheck are:

-Start tracking your spending

-Cut your expenses

-Create and follow a budget

-Prioritize saving

-Start building an emergency fund

-Manage your debt

-Increase your income streams

Remember that changing a habit can be difficult, but with the right attitude, tools and some discipline, getting out of the cycle of living paycheck to paycheck is possible and totally worth the effort. Apply the principles shared in this post and see how your finances improve! 

If you’d like to take the first step and have a discussion with me about your finances, book a free 30-minute ZOOM Financial Discovery call HERE.