10 Reasons You're Still Living Paycheck to Paycheck
You feel like you've made it — you have a job, a sufficient paycheck and are supporting yourself. You should feel secure and stable, and yet you're finding yourself struggling to make ends meet and grow your savings account at all.
Hopefully, you know the size of your post-tax income, your total debts and how your day-to-day spending is affecting your debt-to-income ratio. However, there are myriad pitfalls you could be encountering that are keeping you away from the financial solvency you so desperately seek.
It's easy to come up with excuses: Your company pays you too little, your insurance agent and landlord are gouging you, your bank doesn't offer high-enough interest rates for your money to work for you — however, the problem might just be you.
The 10 Pitfalls That Are Keeping You Away from Wealth
1. You're Paying the Minimum on Your Debts
When you're budgeting for the month, it can be tempting to minimize your debt payments to free up some extra cash for upcoming expenses. However, what is that money move doing to your finances in the long run? The short answer is that it's making you spend way too much money in interest payments, while also harming your credit score.
If you pay the monthly minimum on your credit card purchases, you're likely never going to pay off what you owe. Paying the minimum 2 percent on a bill of $5,000 could cost you more than $13,000 in interest and take you over 39 years to pay off (at an assumed 18% APR). Not to mention, this could affect the interest rates you are offered on other loans in the future — or even prevent you from qualifying for a line of credit at all.
An attempt to improve your credit score or negotiate your interest rate down to 13% could save you nearly $8,000 in interest payments and bring down the time it takes to pay off your debt to a little over 23 years. By opting to pay more than the minimum balance — say a fixed payment of $250 per month — you would save more than $12,000 at 18% APR, and you'd pay off your debt in just two years.
2. You're Busy Keeping up with the Joneses
Your neighbor just bought a new sports car, a peer from college just paid his down payment on a palatial four-bedroom and your coworker wears designer clothes to the office. It's easy to see others living a lifestyle of extravagance and want the same luxuries for yourself; however it doesn't mean that you should live like you're rich before you have the money to back it up.
No matter how successful you are, and how much money you have to show for it, there will always be someone out there who has a newer gadget, a more tricked-out ride or a slightly bigger house. That's life. Trying to keep up with the Joneses will only hurt your bank account later on, when you can't make the auto loan payments for the new sports car you have sitting at the curb.
3. You Fail to Plan for Irregular Expenses
Are you budgeting throughout the year for birthday gifts, potential car-maintenance costs, biannual auto insurance expenses or any other bill that doesn't creep up monthly? If you're not planning for these irregular expenses, you're likely digging yourself into a bigger hole than you realize.
Matt Becker, founder of fee-only financial planning practice Mom and Dad Money, said that these expenses can disrupt even the most robust budget if not taken into account.
"The mistake I see all the time is failing to plan for irregular expenses," Becker said. "That includes not only the bad stuff like car repairs and home maintenance, but fun things like travel and gifts. You should regularly be putting money away for these kinds of expected but irregular expenses so that when they happen, you're not left scrambling to find the money and they don't blow a hole in your budget."
Even if it means adjusting your budget to make room for these expenses, by either saving more or dedicating a portion of your savings to these costs, it'll help you maintain your financial footing each month.
4. You Fail to Plan. Period.
Do you have a budget to begin with? Have you calculated how much money you can allot to food, housing, transportation and personal expenses while still managing to save up a college or emergency fund? If you have no financial plan, you really have no way to build up your wealth or make sure you stay out of debt.
"Everything from going over budget to paying a subscription fee for the free trial you forgot to cancel is the result of a failure to plan," said Stefanie O'Connell, freelance writer and founder of The Broken and Beautiful Life. "Whether it's planning for retirement or planning to brown bag your lunch for work tomorrow, planning can empower you and your finances."
It's one thing to set up a reasonable budget, but if you have no system in place to stick to it, you're doomed to fail. It's important to ask yourself what your budget translates to — e.g., $70 per month budgeted for nights out translates to seven cocktails per month at an average of $10 each, or roughly two cocktails per week. Converting dollars into items can help you keep track of what you can afford and what you simply can't stretch your budget for.
In her book, Say Goodbye to Survival Mode, Crystal Paine writes that, while difficult to create, a budget can be your key to a worry-free financial future:
"Here's the beautiful thing about a budget: while it's hard and limiting at first, over time you'll realize that it's your means to enjoy life without headaches and worry. Ultimately, it's a pathway to freedom. And when you tell your money how to work for you, you can be intentional about how you use it."
According to Kendal Perez, blogger for Hassle-Free Savings, even planning ahead for your ATM withdrawals can save you a lot of cash over time.
"Withdrawing cash all the time from ATM stations that aren't affiliated with your bank is eating into your income," Perez said. "In 2012, the average out-of-network ATM fee was $4.13. Avoid this expense by withdrawing cash at the beginning of the month or getting extra cash at checkout when you're out shopping."
5. You Don't Realize How Handy You Are (or Can Be)
Appliances go on the fritz, things break and get old, and many people call handymen to repair items in their homes regularly. However, in today's digital age, how-to videos and tutorials are available for nearly every topic you could imagine — and handyman costs aren't cheap, averaging $527, according to HomeAdvisor.
"People mistakenly believe that all repairs require hiring a professional to do the job, or worse, that it's easier or cheaper to buy new stuff when they break," said Jody Lamb, public relations manager for RepairClinic.com. "Today, there are expertly produced how-to websites and videos available online that make it easy for novice and inexperienced do-it-yourselfers to fix stuff on their own and extend the life of their appliances and equipment."
6. You Spend Impulsively
You decide to go to the mall to window shop, see something you like and immediately purchase it without looking around for a more affordable alternative, or for a discount code or coupon. Granted, couponing can get extreme, and shopping around can eventually eat away at your savings if you're spending more on gas than the amount of cash you could potentially save. However, buying items on the spot or because you're emotional can prevent you from changing your broke status.
Patience is a virtue of the wallet, as most retail companies put almost every item they carry on sale eventually. It might be last season's style, but the savings could be huge if you wait on those seemingly must-have purchases. In fact, you might even come to realize that you don't really need or want that item in the first place.
According to author and small-business coach Julia Kline, a wish list can help consumers reduce their spending and make their dollars stretch for the items they truly want.
"I often have clients who thought they couldn't afford a new TV, but by simply curtailing their impulsive, unnecessary spending for a month, they found that they had plenty of money for the TV after all," Kline said. "And they were more than happy to sacrifice the extra tube of lipstick, the fancy sunglasses and the expensive carry-out in order to make it happen."
7. You're Still Paying for Your Unused Memberships
Your unused memberships to fitness centers, clubs and organizations can be making a sizable dent in your monthly income. This is a potential pitfall of signing up for automatic payments, as it's easy to lose track of where your money is going and if the amount charged has changed.
It's wise to evaluate the subscriptions you have and conduct a cost-benefit analysis to determine whether you should maintain that Netflix account or 24 Hour Fitness membership. Trim the fat in terms of your subscriptions to the TIME Magazines you never read or the Amazon Prime membership you're not using, and free up some cash to pay down debt or finance unexpected expenses.
8. You Avoid Your Bank Account and Credit Card Statements
The worst thing you can do is deny the reality of your financial situation. Many people avoid looking at their bank account and credit card statements out of sheer fear. This is only a disservice, as you can't tackle your financial situation or properly budget if you don't know how you're faring with your money.
There are additional risks associated with not checking your statements regularly: You could be charged for expenses you did not incur, letting your accounts remain compromised without your knowledge.
Looking through your credit card statements can help you see if you're spending more than you earn, as can reviewing your checking account balance to make sure that each of your paychecks is deposited properly and that you're remaining in the black. Checking up on your statements can also help you adjust your budget to be more realistic to your expenses.
9. You View Your Credit Limit as an Asset Rather Than a Liability
It's easy enough to pay with plastic and not think about the cash needed to foot your monthly credit card bill. A common money mistake is viewing your credit card like a bank account. Your savings are an asset you can pull from until they run out, whereas a credit card provides you with a line of credit that could be a liability if you default on your balance.
If you find it difficult to maintain a budget when making credit card purchases, it might be wise to opt for a cash-only financial policy.
10. You Fail to Think Like an Investor
Rather than just budgeting for needs and wants, an investor would take as much money as possible and invest it in his financial future, making his money work for him. It's easy to let your money sit idle in a low-interest savings account — but what would an investor do?
You've probably heard of the stock market, money market accounts, retirement accounts and laddered certificates of deposit, but are you actively using these products and investments to grow your wealth? Saving for your future by putting some money away in a mutual fund can help create financial stability for yourself long-term, while simultaneously helping you curb some bad money habits you encounter when you view your income as entirely yours to use in the here and now.
This article was contributed by Christina Lavingia of GOBankingRates.com, a leading portal for personal finance news and features, offering visitors the latest information on everything from strategies on saving money to getting out of debt.
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