/ Finance 101

How to get out of the paycheque to paycheque cycle

In 2017, 47% percent of Canadians reported living paycheque to paycheque. Are you struggling with a paycheque to paycheque lifestyle? While your income level contributes to the lifestyle you can afford, managing your money effectively will help you build financial stability even on a modest income.

Living paycheque to paycheque is overwhelming and can even take a toll on our mental health and other areas of our life, like work and relationships. Luckily, it doesn’t have to be permanent. While it might seem inescapable, there are steps you can take to break the cycle and start saving money again.

Here are our tips on how to stop living paycheque to paycheque, no mater how much money you earn:

Create a budget and stay accountable

The first step to managing your finances is creating a budget. However, staying accountable is just as important as creating a budget in the first place. It’s important to cross reference your actual spending with your budget every month. It doesn’t matter how much money you earn, or whether you consider yourself a financial pro – this should still be a part of your monthly checklist.

Print off your transaction history for the last thirty days and total your spending categories to see how they match up. The benefit? Aside from making sure you’re in the green each month, this exercise allows you to find opportunities to reallocate money into different spending categories. You may find you aren’t allocating enough money to some expenses. On the other hand, you might find you’re overestimating in some categories, meaning you can free up some of your money for savings.

Need some help starting your budget? Check out some of these resources:

Set-up pre-authorized payments to come out on the day you are paid

Have you ever blown the budget after payday and spent your earnings on something frivolous like a night out or clothes, and then realized you only have just enough (or maybe not enough) money left to cover important expenses like rent or groceries? A simple solution is to setup pre-authorized payments for your financial obligations on the days you receive your paycheque. Speak with your lender or service provider to see if they would consider an alternative pay date, even if it means you pre-pay the bill, so you can have the amount automatically withdrawn from your account on your pay days instead.

Pre-authorized payments ensure that your paycheque goes towards your financial obligations and savings first. Whatever is left is yours to enjoy worry-free (since all your bills are paid)!

Start saving

After meeting your financial obligations, the next priority for your money should be savings. By making small changes to your money management habits and sticking to your budget, you should have room to regularly contribute to a savings account. We suggest contributing to an RRSP for long-term retirement savings, and contributing to a TFSA for shorter-term savings, such as for emergencies, a down payment, a car or vacation. And, if you have children it’s always a good idea to contribute to an RESP, creating a foundation for their finances and education.

Once you’ve gotten to a point where not only is your budget balanced but you’re also able to save, you’ve broken out of the paycheque-to-paycheque cycle, But, if you’re finding it difficult to get there, we have more tips to help you meet this financial goal:

Get out of overdraft

Overdraft can be costly, and it perpetuates the paycheque to paycheque cycle. Prevent bank fees by keeping a cushion of money in your account that stops you from going into overdraft. Plus, that extra cushion of money can help you cover emergency expenses if they arise.

Prevent financial emergencies before they happen

Emergency expenses are a big reason why people end up living paycheque to paycheque. If possible, try to be proactive about potential emergencies. Sometimes home repairs start off as something that’s affordable, but when ignored can turn into a more expensive problem in the future. Is your car always breaking down? You might be financially better off by buying a newer, more reliable model.

Even when things are going well, don’t forget to save for emergencies. Put aside some money each month that you can use toward home, car, medical or other expenses when they arise.

Don’t make the mistake of ending up house poor

It’s easier said than done in the current housing market, but being house poor can put a strain on your budget. It’s better to sacrifice some features of your home than to have a large portion of your income going towards a mortgage payment, utility bills and maintenance. If you own a house, and are living paycheque to paycheque, the good thing is you do have the option of selling and potentially downsizing, which will hopefully create more flexibility in your budget.

Find an affordable hobby

If expenses are taking up most of your income, there’s not much money left for leisure. Maybe it’s time to take up a new hobby that’s more affordable. Learning to have fun with friends and family on little to no money will make a big impact on your financial situation.

Fun fact: spending money stimulates dopamine in the brain, which is why even higher-earning individuals are susceptible to a paycheque to paycheque lifestyle – we essentially become addicted to spending money. By finding affordable activities that make us happy, we can rewire our brain and stay content while spending less.

Earn more income

If you’re cutting back on as many expenses as possible and are still just getting by, it may be a good idea to earn some extra income. Perhaps you can ask for a raise at work, or you can do something on the side. There are a lot of side jobs that pay well. You may have to sacrifice some of your free time, but the financial freedom will be worth it. Looking for some ideas? Check out this list for ways you can earn money on the side.

Find free money management resources  

Finances are difficult, and you don’t have to manage them alone. There are resources available. Check with your local library or community centre to see if they offer any free courses on money management. You can also check out the Government of Canada’s website for information about different types of investments, budgeting, and even free financial tools and calculators. And, since you’re already here, you can check out our other blogs – we write about topics like budgeting, financial tips and information about borrowing money.

If you’re sitting here wondering how you’ll make it to your next paycheque, take a deep breath and know that it won’t always be this way. While you’ll have to make sacrifices, and will have to closely watch your budget, the relief of knowing you have enough money to cover your expenses each month will be well worth the hard work.   

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