What does it mean to live paycheck to paycheck?

• Living paycheck to paycheck means you spend as much as you earn.
• 59% of Americans live paycheck to paycheck.
• Spending less than you earn is the way to break the cycle.

We’ve all heard the phrase “living paycheck to paycheck.” You may have even used it to describe yourself. But what does it actually mean? And how can you get out of that cycle?

The answer to these questions are surprisingly simple, but doing it is anything but easy.

What is Living Paycheck to Paycheck?

Living paycheck to paycheck is pretty self-explanatory in the name. By the time you get to your next paycheck, the previous one has already run out. To use math terms, your expenses are greater than or equal to your income. You always spend at least as much as you are bringing in. And that is dangerous.

When you’re living paycheck to paycheck, you know that you have a certain amount to spend each month and that is what you spend. The problem arises when you have an unexpected expense. Say you have an emergency dental bill, or you have to travel for a funeral, or your car breaks down. Any one of these emergencies can derail your delicate paycheck balance and spiral you into debt.

If you’re living paycheck to paycheck, you must be poor and making very little money, right? Not necessarily. Living paycheck to paycheck is simply the condition of running out of money before your next paycheck comes in. If you make $10,000 a month and spend $10,000 a month, you are living paycheck to paycheck just as much as someone who makes $2,000 a month and spends $2,000.

In fact, the number of Americans living paycheck to paycheck and the range of salaries of Americans who live paycheck to paycheck will probably surprise you. Of course, there are a lot of advantages to making a higher salary, but it doesn’t protect you from making poor financial decisions.

Paycheck to Paycheck by the Numbers.

So who is living paycheck to paycheck in America? The answer is most of us. According to a study performed by PYMTS.com in conjunction with Lending Club, 59% of all Americans are living paycheck to paycheck. That means that more than half of all Americans pay their bills every month and have nothing left over, or worse.

While the effects on those who make $50,000 or less are higher (nearly 75% of people in this group report living paycheck to paycheck), those making higher incomes are not immune either. Nearly 43% of Americans making over $100,000 also reported living paycheck to paycheck.

Besides the raw number “59% of all Americans live paycheck to paycheck”, there are two other pieces of this study that should not be ignored. First, it is getting worse. In May 2021 54% of Americans were living paycheck to paycheck. So Americans living paycheck to paycheck has increased by 5% in the last year. A lot of this change has to do with the pandemic and recent increases in inflation, but it is still concerning!

On the other hand, the percentage of people living paycheck to paycheck who aren’t paying all of their bills every month decreased. That means that living paycheck to paycheck, in general, is increasing, but the number of people who are at least financially stable (meaning their expenses don’t exceed their income) is also increasing.

In other words, here are stages to go through. If you are currently in the first stage, living paycheck to paycheck without covering your bills every month, then your first step would be to become financially stable and live paycheck to paycheck while covering your bills every month. Then from there, you can take steps to break the paycheck-to-paycheck cycle entirely and start growing from financially stable to financially independent.

Recommended Reading: Five Signs of Financial Instability

Image Credit: Shutterstock

How to Break the Cycle

Now that we realize that living paycheck to paycheck is a problem, the question is how do you get out? Isn’t it impossible to break this cycle without a windfall like inheriting money or winning the lottery by definition?

The answer is not by a long shot. There is a very simple, but not easy, way to break the paycheck-to-paycheck cycle. That is to spend less than you earn.

That might seem like an odd solution, but the problem when living paycheck to paycheck is essentially that you are spending exactly as much as you earn (or more). That means to break the cycle you must spend less.

Spending less than you earn will allow you to put money aside for emergencies in an emergency fund, start saving for upcoming large expenses, and then invest for the future. This will start to move you along the path from being financially stable to financially independent.

So How Do You Spend Less Than You Earn?

The first step to spending less than you earn, even if you are a low-wage earner, is to track your spending. You need to know where your money is going before you can start cutting back some of your spending. Just the act of tracking your spending helps many people cut back on spending. But if not, you can then look at what you’ve spent on in a month and start to prioritize. 

• Does eating out mean that much to you?
• Does that subscription get used?
• How many amazon packages do you really need? Etc.

When you notice spending on things that don’t matter to you, that is what you cut. The more you can cut, the easier it will be to break the cycle. Remember, the three biggest financial obligations are housing, transportation, and food, so any way you can cut back on these will be the biggest win.

You can also take steps to increase your income. Working toward getting a promotion, a higher-paying position, or building a side hustle are all ways that you can increase your income to grow the gap between what you spend and what you earn. The key though is to keep that gap big. The reason people are living paycheck to paycheck despite high salaries is because of “lifestyle inflation”. This is the idea that as you make more money you spend more money so there is never enough.

By tracking your spending, cutting back on unimportant spending, and increasing your income, you can start to put money aside, thus breaking the paycheck-to-paycheck cycle.

Recommended Reading: Four Types of Budget

The Money Wrap Up

If you are one of the Americans that is currently living paycheck to paycheck, first realize that you are not alone. Loss of income, economic struggles, economic inequities, being a low-wage earner, and inflation-increasing living expenses don't make it easy to break the cycle. The first step is to get educated about finances. Capway can help you learn about money on a variety of topics. As you learn, remember to follow these steps.

• First, track your spending.
• Second, cut back on expenses any expenses you can.
• Third, take steps to earn more by increasing your spending. 

By following these steps you will be well on your way to breaking the paycheck-to-paycheck cycle.

What is your first step to break the cycle? Comment below.

Main Image Credit: Shutterstock