Stop living paycheque to paycheque — for good

No one likes to scramble to make ends meet. It’s stressful and it’s next to impossible to get ahead financially. But it doesn’t have to be this way. Break the cycle of living paycheque to paycheque permanently with these five steps.

1. Master the budgeting process

Anyone can make a budget. Download a template, scribe in the numbers — money in and money out — and look at what’s left over, your bottom line, then make promises to yourself about doing better. To stop the paycheque to paycheque cycle, you’ve got to live within your means. That means spending what you have and nothing more. The only way to do that is to get darn good at tracking where your money is going, daily.

Yes, daily tracking is where the hard work happens. It’s where the aha moments around your spending habits come to light. This is the awareness you’ll need to make permanent and positive change in the relationship you have with your spending.

(Note that it is healthy to have affordable, fun spending baked into your budget.)

Start here: Take the next 30 days to track every itsy bitsy detail about where your money is going: Amazon, car insurance, rent/mortgage, kids shoes and so on. Put it all in a spreadsheet, and update it daily. Don’t wait until the end of the month to input your receipts.

2. Curb impulse spending and trim back

Chances are you’ve got too much money going out the door relative to what you’re bringing in, which is why you’re frustrated about your high credit card bill and the fact that you can never find the money to save for retirement, let alone a $ 1,000 emergency.

That stops today.

Using the powerful data you collected through tracking your spending, you can now cut back. There are two places to trim. First are the variable one-off costs like adding a silly $ 4 stress ball to your cart at the checkout or literally turning the AC and lights off when they aren’t needed and switching to a lower-cost grocery store. Second are the fixed costs like your rent, mobile and internet plans, car payments and so on.

When tackling impulse buying, my best advice is, if you don’t have it proactively baked into your budget for the month ahead, don’t buy it.

Start here: Go line by line through your 30-day spending tracker and start strategizing on how to cut back on each category. You may need to negotiate for lower rates, or change your behaviours or even your vendors. If impulse shopping is your vice, try the 24-hour rule where you wait a full day before purchasing. Chances are, the urge to buy will subside.

3. Stop using credit cards and switch to “cash”

Whether digital debit card or physical cash, one of the best ways to make serious progress on your money is to completely STOP using credit cards until all of your balances are eliminated.

“But what about my points?” you ask.

No amount of points is EVER going to be worth collecting if you’re carrying a 19 per cent credit card balance, or if your line of credit balance is growing each month due to consumer spending.

The cash system works because when you’re out of money, you’re out. From a money psychology standpoint, we also see that people are better with their proactive planning and the prioritization of their hard-earned cash when there is only so much to work with. This can assist in forming new permanent healthy habits around spending.

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Once you’re debt free, fill your boots with using your credit card again, but only to the point where you can pay the whole thing off within 30 days, every month.

Start here: Take your credit cards, put them in a reusable container, fill the container with water and freeze it. Next time you go to whip out your credit cards to pay, they’ll be frozen — ha! Clear your saved credit card numbers from your browser, too.

4. Budget for BASE income, and don’t bank on potential lump-sum earnings

Yes, eventually you’ll want to start earning more money. For now, though, living within your means is the goal. I can tell you from my experience coaching and counselling people on their finances for more than 15 years that throwing more income into a bank account that has “holes” in it (a.k.a. overspending) WILL NOT solve the problem. Of course, there are some exceptions, but these are rare.

Lump-sum money from bonuses, inheritance or the side hustle you hope to start should be left out of the equation until the money becomes “real” and hits your bank account, in which case, go to step 5 with these funds.

Start here: Plan your entire spending on your base earnings and if you’re 100-per-cent-commission based, take the average of your lowest six months for planning purposes.

5. Get in the habit of saving in three buckets

The secret to getting out of the paycheque-to-paycheque cycle is to have savings. I recommend three buckets. First is to fund emergency savings. The purpose of this bucket is to help tide you over in the event of something unplanned that could impact your finances, like having to pay an insurance deductible due to an accident, or finding yourself out of work for a period of time. It takes time to build this up, so start with regular contributions of about 3 per cent of your take-home pay regularly until the fund reaches a minimum of three months of essential expenses. The second bucket is savings towards big-ticket items you know are coming. These can be fun, like a 2022 vacation (hopefully) or not-so-fun like a planned roof repair. Fund this account regularly with 2 per cent of your take home. This account will ALWAYS be in use so don’t stop these regular contributions. The last bucket is retirement savings, for which the goal is to save 10 per cent of your take-home pay. The best accounts for this money are the RRSP and TFSA.

My best advice with lump-sum monies is to make an effort to fund these three savings buckets, and pay off consumer debt.

Start here: Set up automatic contributions towards these accounts on pay day. This ensures the money comes out promptly and before it has the chance to disappear into the abyss of other spending.

The deal is this: If you don’t work at stopping the cycle, it will lead to increasing levels of debt. Why not make it a priority to start following these five steps as best as you can, and celebrate your financial wins along the way. You’re going to make a few mistakes, and that’s OK. But rebound fast and get back on track.

TORONTO STAR