How to Break the Paycheck-to-Paycheck Cycle

Quick Answer

Steps to break the paycheck-to-paycheck cycle:

  1. Get a clear picture of where your money is going
  2. Create a budget and don't overspend on things
  3. Find areas where you can cut spending
  4. Set aside savings and build an emergency fund
  5. Ask for advice and get help when needed
Young woman drinking coffee relaxing on window sill at home.

If you're living paycheck to paycheck, barely making it from one pay period to the next without running out of money, you may be ready for a change. You can break the paycheck-to-paycheck cycle by evaluating where you spend money, creating a budget, cutting costs and employing other good money habits.

A whopping 70% of Americans live paycheck to paycheck, according to a recent survey by marketing research company OnePoll. Not only is living paycheck to paycheck stressful, but it can make it difficult to reach financial goals like paying off debt, buying a home or reaching financial freedom in retirement.

Luckily, you can make immediate changes and strive for financial security with these five key steps for breaking the paycheck-to-paycheck cycle.

1. Track Your Spending

The first step to breaking the paycheck-to-paycheck cycle is to get a clear, specific picture of where your money is going. Start by tracking your expenses for the previous month to get an idea of your current spending habits. Going forward, track your expenses as part of a weekly or monthly routine.

Sort your expenses into categories such as essential and nonessential spending; you can then further break down those categories into housing, utilities, groceries, eating out, car, clothing, savings and more to get an overall picture of how much you're spending in each area.

You can track your expenses with pen and paper, in a spreadsheet or by using a money-tracking app like YNAB, Mint or Goodbudget. Some apps link to your bank account, so your expenses are tracked automatically. On the other hand, manually recording your spending can help you stay actively aware of your cash flow, and the knowledge you'll get when you take time to enter a transaction may even help you think twice about an unnecessary purchase.

2. Make a Budget

Tracking your expenses alone won't necessarily stop the cycle: You now need to make a budget aimed at reducing expenses and getting your finances under better control.

Start by adding up your net income (your take-home pay after taxes and other payroll deductions) each month. Next, subtract your fixed expenses: your housing payment, utilities, phone bills, car payment and any other essential expenses. Make a category for savings too (more on this later).

After you've subtracted your essential expenses from your income, whatever's left is your discretionary income. This goes toward everything else: groceries, pet expenses, clothing, beauty and hygiene products, entertainment, hobbies and so on.

One of the best budget plans for breaking the paycheck-to-paycheck cycle is called zero-based budgeting. In a zero-based budget, every dollar you receive is allocated to a specific purpose, so there's no room left for overspending. Everything you spend money on gets its own category, including irregular expenses like gifts, furniture or tech upgrades, as well as money you put into savings. When you subtract your expenses from your income for a given month, the difference is zero.

If creating a zero-based budget sounds too strict, don't worry: There are several types of budgets you can choose from, and the best one for you will be the one you can maintain over time. With the 50/30/20 budget, for example, 50% of your budget goes toward basic necessities, 30% toward discretionary spending and 20% toward savings and debt.

No matter which method you choose, flexibility is key to staying on budget. If you overspend on a new pair of shoes, for example, make up the difference by reducing spending in another discretionary category, like dining out.

3. Find Ways to Cut Costs

Now that you've started tracking your expenses and created a budget, look at your spending with a fresh eye to help you find opportunities to cut back.

Here are some areas where you might be able to cut costs:

  • Monthly bills: Utility, phone, internet and insurance bills are constant expenses, which makes them a promising area to try to cut back. Can you lower your energy bill by turning down the heat, using fewer lights or using appliances less often? Can you downgrade your phone plan? Can you qualify for better home or auto insurance rates?
  • Subscriptions: If you're signed up for multiple video or music streaming services, news subscriptions or monthly subscription boxes, you may be losing cash on purchases that don't add value to your life. Cancel anything you don't truly want or need.
  • Food: How you manage your food budget can make a huge impact on your cash flow. If you're dining out regularly, you can substantially cut costs by cooking at home. If you're already prepping your meals at home but need to lower your grocery bills, try couponing, cooking meals with low-cost ingredients and creating a meal plan that takes advantage of leftovers.
  • Shopping: How often are you buying new clothes and shoes? Try cutting back by wearing what you already have, sticking to a limited clothing budget or shopping secondhand. The same can apply to home goods, technology or any other items you frequently spend on.

4. Automate Savings

Not only should you budget for savings, but you should treat saving as a high-priority expense. If you wait to set aside some money for savings after you've covered expenses and done all your shopping each month, you may find there's nothing left. Instead, automatically funnel a portion of each paycheck directly into a savings account. Then, build the rest of your budget around what's left. In other words, pay yourself first.

If you're currently just barely covering all your expenses each month, saving for the future may feel unrealistic. But creating an emergency fund should be a priority for you if you're living paycheck to paycheck. When you have an emergency fund, you're less likely to rely on credit cards in a pinch, thus avoiding racking up debt you can't afford to pay back.

Experts recommend an emergency fund large enough to cover three to six months of expenses, but focus on saving a little each paycheck. Aim for an attainable amount to start, like $500 or $1,000, and you can go up from there.

5. Talk to Others

When you're living paycheck to paycheck, you may be just one unexpected expense away from a potential financial emergency. Shouldering the burden of that uncertainty can be stressful.

If you're feeling anxious about money, you're not alone: 60% of Americans report feeling stressed about money and cite insufficient income, debt and budgeting challenges as contributing factors, according to a recent Financial Industry Regulatory Authority poll.

Talking to a trusted loved one can help you feel more at ease. If you need additional support, a reputable credit counselor can help you create a budget and manage debt. Some consumers may qualify for free or low cost financial assistance and debt counseling.

Don't Forget to Track Your Credit

Alongside building a plan for your money, make a plan to improve your credit score. A good credit score can help you qualify for more favorable rates when you're ready for long-term financial goals, like buying a home or a car.

To add monitoring your credit to your financial wellness plan, start tracking your credit through Experian's free credit monitoring service. You'll be able to track your score and review personalized tips for building your credit.

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