Living Paycheck to Paycheck? Here's How to Break the Cycle
There's a simple word that strikes fear in the hearts of any cocktail-swirling, shopping-loving millennial: "budget." We know that tracking our financial habits is the grown-up thing to do—over a third name saving money as their top resolution of 2016—yet more than half live from paycheck to paycheck. So what does it actually take to break the bad habit?
If the thought of checking your bank balance makes you shudder, financial expert and host of Money Minute Stefanie O'Connell says it's time to shift your attitude. "It's not about sacrificing everything today for the sake of tomorrow, just as it's not about saying YOLO at the expense of your future. It's about making financial decisions with equal consideration for both."
If you're among the masses who struggle to stick to a budget or can't understand why your savings account has stalled, follow these five simple steps to get in the green. Budget-phobes, your new financial future starts here.
Establish Baseline Spending
The first step to get your finances in order is to grasp your baseline spending habits and income. "If you're in the cycle of living paycheck to paycheck, you have one of two problems: a spending problem or an earnings problem—maybe both," says O'Connell. "The only way to figure it out is to write everything down—everything you spend and everything you earn. Track it all for at least one month; then make note of where you might be overspending."
Try it now: Overwhelmed? Download a money-tracking app like Mint or Level to automate the process with zero effort. Simply link it to your bank account and the apps will be able to tell you exactly where your money is going. Easy.
GET TO WORK:
If you never managed to stick to your goals, it's likely you're making one vital mistake. The key is to "experience your goals more visually, emotionally, and experientially, [so that you] become invested in those goals and stay committed to the behaviors required to achieve them," O'Connell says.
Feeling connected to your goal helps guard against what she calls "present bias," the tendency to make decisions to gratify your short-term self at the expense of your future self. Research suggests that people who are able to connect with their future self via visualization or detailed goal-setting make smarter long-term decisions.
Try it now: "[Choose one thing that] resonates with you and motivates you to save; then make it visual. Put that reminder some place where you have to check in with it regularly, particularly in moments of temptation," she recommends. If you're saving for a home, update your desktop background with a beautiful interior image to boost your chance of success.
Automate Financial Decisions
If you only do one thing to better your finances, it should be this. "Automation is one of the most effective ways to implement financial habits. When you set your default action to be proactive, you’re much more likely to experience positive financial outcomes," O'Connell explains.
In other words, minimizing the number of financial decisions you have to make each month removes your ability to make the wrong choice, like ignoring a bill or forgetting to transfer money into your savings account.
Try it now: Spend 10 minutes setting up auto-payments to cover regular bills and savings and retirement contributions. "Set up an automatic transfer from your checking account to saving to pull right after payday," says O'Connell. "If you don't see the money sitting in your checking account, you won't think of it as money to spend."
Spread Out Splurges
A massive 65% of millennials say impulse shopping is the main reason they struggle to save. Thankfully, the answer isn't to restrict your habit altogether, but rather spread out how often you allow yourself to splurge. "Another great option for reducing costs without cutting them out entirely is rethinking their frequency," says O'Connell. "Just as you might transition from daily to weekly happy hour for the sake of your health, adjusting the timeline of your spending splurges can go a long way in supporting your financial health without resorting to total deprivation."
Try it now: You've had two items sitting in your cart for weeks and are itching to buy them both. Choose one item to buy now and tell yourself you can purchase the second in three weeks time. This buffer period will prevent you from making impulsive decisions and boost your sense of gratitude.
Focus on Big Wins
Small indulgences like buying coffee each day or ordering an Uber instead of taking the subway often dominate budgeting advice, but O'Connell says the best way to boost your savings without sacrifice is to focus on big wins. "Yes, you can save a little bit here and there by clipping coupons and skipping lattes, but if you really want to move the needle, focus on your biggest expenses, like housing, insurance, and transit."
Try it now: Take a broad look at recurring costs like insurance or mortgage repayments. Are you getting the best possible deal? "For example, by improving your credit score, you can qualify for better interest rates on your mortgage and even your insurance premiums. That can save you tens of thousands of dollars in the long run, as opposed to saving a couple bucks here and there."