How to Budget When You Live Paycheck to Paycheck

Three out of every four Americans claim they live on a monthly budget; 84% of those on a budget admit to excessive spending, and 58% live paycheck to paycheck. The numbers don’t add up.

Give me a dime for every time someone budgeted incorrectly, and we wouldn’t need to budget at all! Luckily, we’re here to help define a real budget, how to make one, and the steps to follow when living paycheck to paycheck to reach financial freedom.

1.    Learn How to Make a Real Budget

A real budget will have different numbers for different people, but certain aspects are unavoidable.

  • Real budgets are organized, realistic, and updated consistently.
  • Real budgets track all expenses and income – even that $3 gas station coffee and the $20 your grandmother slips you during Christmastime.
  • Real budgets incorporate a savings plan and work to eliminate living paycheck to paycheck.

Real budgets find a way to cut expenses and – potentially – increase income.

Whether you’ve never budgeted before or done so incorrectly for years, it’s never too late to get in the game and work your way toward a more secure financial future. You’ve made it this far, so you’re already on the right track!

2.    Set Up Your Budget

Now that you know what a real budget entails, it’s time to construct one right for you. Be sure to update it consistently – weekly at a minimum – and be realistic about your numbers.

There is no cookie-cutter method for deciding which expenses are right and which ones should be lowered or eliminated, but the following general guidelines are a good place to start.

Choose a Tracking Method

Use an app or electronic method to track your budget so your calculations are done for you. If you prefer pen and paper, start fresh with a new notebook but always double-check your math.

Track Your Expenses

The best time to start a budget is at the end or beginning of a new month. Look back on the last thirty days of your spending and write down how much you spent in the following categories and subcategories.

  • Housing (rent/mortgage, utilities, home upkeep expenses, taxes, etc.)
  • Food (groceries, eating out, drive-throughs, spontaneous snack purchases, etc.)
  • Transportation (car payments, public transportation costs, gasoline, insurance, registration and license fees, parking, etc.)
  • Shopping (necessities like toilet paper versus wants like a new purse)
  • Entertainment (subscriptions like streaming and magazines, travel, social outings, etc.)
  • Investments and savings (401k, IRAs, stocks, cash savings accounts, Cryptocurrency, etc.)
  • Healthcare and insurance
  • Miscellaneous expenses

Add additional specific categories or change their titles to suit your lifestyle. Calculate the total for each category as well as the total of all expenses.

Track Your Income

Now, track your income for the last 30 days from work, assistance, gifts, and any other sources. Include:

  • W-2 income
  • Freelance or gig economy income
  • Gifts and inheritances
  • Bonuses and raises
  • Any cash income – even finding money in your pocket or on the ground!

Calculate the total for each income category and your total monthly income.

3.    Cut Down on These 3 Money-Suckers

If you’re living paycheck to paycheck like most Americans, your expenses will equal or exceed your income. Luckily, there are plenty of ways to lower expenses and increase income.

You could begin by cutting out those smaller, spontaneous purchases here and there that surely add up during the month. If you want to get aggressive with your budgeting, however, you’ll need to tackle one or multiple of the following money-suckers:

  • Transportation
  • Housing
  • Food

Cutting Down on Housing Costs

Housing is by far the greatest expense for most Americans, and the general rule is that it should not cost you more than a third of your monthly income. Cutting down on housing costs is uncomfortable and takes courage, but is it more uncomfortable than living paycheck to paycheck for the rest of your life? That’s up to you to decide.

The following ways to cut housing costs aren’t easy, but they’re guaranteed to put hundreds back in your pocket at the end of each month.

  • Downsize, find a cheaper home, or find a home closer to work to cut commuting expenses. More space is often more attractive, but it comes with higher bills, more stuff we don’t need, and more maintenance.
  • Consider house-hacking, when you rent out a room, part of your home, or your land to a tenant or to store property. Owning a duplex, living on one side, and renting out the other is also a form of house-hacking that could virtually eliminate your monthly housing payments.
  • Negotiate your rent or refinance your mortgage.
  • Research property tax reductions, insurance costs, and different provider options for your monthly bills. Just because you were given a price when you moved in doesn’t mean it’s the only option.

Cutting Down on Transportation Costs

Experts recommend spending between 10% and 15% of your income on transportation costs, as it is the second-largest expenditure for most U.S. households behind housing.

Most families need a car to get around unless they live in a big city, but there are key ways to lower monthly transportation costs that almost anyone can take.

  • Trade in a car with high monthly payments for one you can pay less for or pay off. Many millionaires attest that buying a new (financed) car is one of the worst financial decisions a person can make. Consider the practicality, safety, and reliability of the vehicle in getting you from point A to point B.
  • Consider public transportation, even if it’s just a couple of times per week. Those with rush-hour commutes will save time, money, and gas emissions.
  • Reconsider the need for two cars in your household. Many families have a second or third vehicle that could be useful but instead drains their wallets.

Cutting Down on Food Costs

Food is an easy category to cut down for most when we realize how much we spend eating out and at the drive-through. Save a bundle every month by:

  • Buying in bulk
  • Meal-prepping with low-cost, easy recipes
  • Packing your lunches during the week
  • Eating out only for special occasions and on planned dates

4.    Start an Emergency Fund

An emergency fund is the difference between financial security and living paycheck to paycheck. While you cut down your payments, your total expenses should remain the same.

Why is that? Any money you save by cutting expenses should automatically be funneled into an emergency fund.

This fund could be a cash or savings account separate from your checking account where you slowly build up about three months’ income as a financial security blanket. If you ever lose your job or find yourself in a tight financial predicament – like when your car suddenly starts making that discomforting puttering noise – you’ll have money to turn to that saves you from taking out a loan or owing on your credit cards.

Not all savings accounts are created equal. As of July 2023, plenty of online accounts offer over 2% interest on your money. When you use sign up for Clair, you’ll get a high-yield Savings Account with up to 2% APY. It’s a no-fee, high-interest account that can help grow your savings fast. You can also use the Clair digital banking app to automate reminders to save and move money to your savings account so you can become consistent in saving. 

5.    Find Ways to Increase Your Income

Cutting expenses is vital for a successful beginner’s budget, but you can truly pump the gas on your savings when you also find a way to increase income. This will take some extra effort and/or negotiation, but it could make a huge difference in how fast you’re able to save and secure yourself financially.

  • Negotiate your salary if you’ve been with your company for a long time.
  • Look for other opportunities if you could be paid more elsewhere. Don’t exchange comfort at your company for thousands of dollars during your lifetime.
  • Take on freelance work, a side gig, or a second job if your time allows.
  • Learn new skills to make yourself more marketable

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