First Steps to Breaking the Paycheck to Paycheck Cycle
by Anamarie Diaz, The Financial Flutist. Published March 24th, 2023.
For the majority of my life after college I lived paycheck to paycheck. I always had just enough money for rent and bills, or during the really bad months, I turned to my savings to cover those last few expenses. I felt like I was walking a money tightrope and could fall off at any moment. I felt embarrassed, frustrated, and stressed.
The paycheck to paycheck cycle is when your entire paycheck goes to paying your living expenses with very little, if anything, left over. When you are in this cycle, some months your paycheck may not cover all of your monthly expenses, which leads to a heavy reliance on credit cards or savings ultimately leading to a bigger hole that you’re in. Living paycheck to paycheck can also mean that individuals have very minimal savings or are depleting their savings very rapidly to cover monthly expenses.
One of the main reasons why getting out of this cycle is so difficult is because there is very little “wiggle room”. If all of your income is going towards paying your bills, then it can be very difficult to see any opportunities to pay off debt or save money. For some individuals, they may find that there is nowhere in their budget to cut expenses. If your only monthly expenses are your living expenses, then it can be tough to try and cut back anywhere. There is no room to try something new with your money management because you’re doing a financial balancing act. When you’re living paycheck to paycheck, it can be incredibly unclear what the problem is that is causing this cycle and how to solve it.
Factors That Can Contribute to the Paycheck to Paycheck Cycle
Living paycheck and paycheck can seem never ending. For many people there are usually 3 factors that contribute to this cycle.
Mental Budgeting
Mental budgeting is a sure way to get caught in the paycheck to paycheck cycle. Mental budgeting is when you have a rough idea of how much you make in a month, and as expenses come in, you have a general idea of how much money is left over. The issue with mental budgeting is that it is highly inaccurate. How many times have you opened your bank account and been surprised by the amount in it? That is due to mental budgeting. There is no way you can keep track of all your monthly expenses in your head.
It is crucial to know down to the penny what your monthly income and expenses are when you are living paycheck to paycheck. Often just writing down these numbers can give you a sense of control and power.
Inability to see the problem area
What is causing the paycheck to paycheck cycle? Often it comes down to either a spending issue or income issue. If you are mental budgeting, you may not realize how much you’re actually spending in a month. So, when you get to the end of the month you don’t know where your money went and once again it is a struggle to pay those last few bills.
Alternatively, you could know your numbers forward and backward, and because of that you know there is no place for you to cut back with your spending. This means the issue lies with your income. Perhaps the cost of living in your area is outpacing the income rate of your job. No amount of cutting expenses will help, the only solution is to increase your income.
Too much debt
There is a responsible amount of debt you can take on and an irresponsible amount of debt you can take on. If your debt payments are causing you to barely be able to afford your living expenses, you’ve taken on too much debt for the amount of money you make. Your monthly debt burden should not exceed 36% of your monthly income.
It’s important to note that these are not the only factors that contribute to the paycheck to paycheck cycle. Beyond these there are other external factors that cause individuals to live paycheck to paycheck. These include income disparities, the rising cost of living and stagnant minimum wage, and systemic socioeconomic oppression.
First Steps to Breaking the Paycheck to Paycheck Cycle
The paycheck to paycheck cycle doesn’t have to be forever. Here are 3 steps to start breaking this cycle:
Know Your Numbers
Identify your monthly income and expenses, and calculate your end of the month balance. If your monthly expenses exceed your monthly income you are spending more than you are making each month.
If this is the case, identify where you are spending the most money. Is it on your fixed living expenses, like rent, utilities, groceries, etc? Or is it on your lifestyle expenses, like eating out and entertainment? Many times it is our fixed monthly living expenses that are the source of the issue. This is because these expenses can’t easily be cut. Try to keep your living expenses between 50-60% of your monthly income.
2. Pay off debt
Being in debt can cause a lot of financial stress. If you find that a lot of your monthly income is going towards debt, it’s time to create a plan to pay it off. There are two methods used to pay off debt; the debt snowball method and the debt avalanche method.
With the debt snowball method, list out all of your debts from the lowest balance to the highest balance. While paying the minimums on all of your debts, pay the most towards the debt with the lowest balance. Once that debt is paid off, move onto the debt with the next lowest balance. Each time you pay off a debt, the amount you can put towards your next debt will increase, thus a snowball effect.
With the debt avalanche method, list out all of your debts from highest APR (interest rate) to lowest interest rate. Similar to the debt snowball, pay the most towards the debt with the highest APR while still paying the minimums on the rest of the debts. Once the highest APR is paid off, move onto the debt with the next highest APR
Both of these methods allow you to create a plan to help you pay off your debt. The debt snowball method is great for morale because you will pay off your smaller debts quickly, while the debt avalanche method is great if you want to save money in the long run. Remember, each time you pay off a debt you get an immediate pay raise. Lessening your debt burden will allow you to use the money you previously put towards your debts to other things like savings and retirement.
3. Increase Your Income
While knowing your numbers and creating a debt payoff plan can happen more immediately, in the long run look for ways to increase your income. For musicians this can seem like a daunting task but here are some ways to accomplish this:
For Private Music Teachers: Teaching privately can be a great source of consistent income.
Be sure your teaching rate is aligned with the going rate in your area, your education, and what you are offering in your studio.
If you haven’t had any request for lessons lately, reach back out to schools in your area and offer to do a free sectional. This will help get your name out to music directors and students.
Your studio doesn’t have to just offer private lessons. Think about hosting masterclasses or other one-off events for students outside of your studio and charge a small admissions fee.
For Freelance and Gigging Musicians: While sometimes it doesn’t seem like this, opportunities for gigs are endless.
If you mainly play a certain type of gig, look at expanding your market. For example, if you mainly play wedding gigs, look at tapping into the corporate gig market.
Expand your network. Often when we are trying to get established in an area we do a great job at reaching out to other people in the community to make connections. However, when was the last time you did this? Even if it’s only been a year, reach back out to connections to keep the relationship current. They might have opportunities for you.
Add to your offer. As a gigging musician you are providing a service. By adding more value to your service, you can charge more. For example, if you play weddings, part of your service could be dressing in one of the wedding colors or giving the couple a framed set list of what you played for their special day. Adding small pieces of value to your service doesn’t have to cost you much, but will allow you to greatly increase your rate.
Living paycheck to paycheck is not only financially stressful but can take a huge toll on our mental health. While breaking this cycle won’t be an overnight process, it is possible to overcome this circumstance and start creating good financial habits.
BIO
Anamarie Diaz is a flutist, educator, arts administrator, performer, and entrepreneur in Richmond, VA. She currently teaches privately at her home studio, DiazFlute Studio, is the Artistic Director of Classical Revolution RVA, and is in the process of earning her Accredited Financial Counselor certification.
Instagram: @thefinancialflustist
Website: www.thefinancialflutist.com