As you might expect, this is a common occurrence. You know that feeling at the end of the month where you take out your debit card and go to pay for something. A little voice in the back of your head asks: “is there enough in the account to cover this?” There is a surprising amount of people in this category.
The pressure on our paycheck is from all sides. It seems like everyone has their hand out and you are juggling spending priorities all the time. Often you end up with nothing, and others end up with your money. The process starts again after each paycheck.
How do you know you are living paycheck to paycheck? Yes, you might say this is obvious. It is not that people are not aware of it, but that they haven’t thought about naming this behaviour and look to changing it.
It doesn’t matter what the salary is really. You can earn a big salary but if you are able to spend big, then you could still be in trouble.
The Hamster Wheel
Living paycheck to paycheck may suit you for a while but not for long. How is it sustainable that you spend everything you earn each month with nothing to show for it? It is like a Hamster wheel where you end up in the same place at the end of each month. You must get off at some point.
Are you born just to earn money to buy things to satisfy producers of products and services? Is this what you want your money to do?
People run harder and harder in this wheel just to keep up and buy the things that were once thought of as luxuries that become wants and these wants become habits and needs. Habits need very little input or thought. If you view something as a need, then it is viewed as essential.
Lifestyle Creep
This simple term captures the meaning of this financial “behaviour” so well. Simply put, you spend more when you earn more and the more you have, the more you think you need, and discretionary spending increases. What you think you need increases because you can afford it. Luxuries become necessities and this becomes difficult to take away once normalised.
Where once you had a basic TV package, now you have a super-duper sports and movies package, Netflix, Amazon Prime, or other streaming services thrown in. Where once you had a monthly takeaway, it could creep to once a week. Normalising this could embed this behaviour.
Take an example of getting a raise. The new income is very welcome, but unless you have earmarked this for something specific, the danger is that it will just leak away with lifestyle creep.
I work with those looking to free themselves from the burden of debt. I often analyse each item of expenditure and asking, “Is this really necessary?” and “what would happen if you stopped this spending?”. It gets unexpected results as many clients never ask these questions of themselves. It leads both to achievable reductions in expenditure, and a new outlook on how to use their money.
Effects
- It is stressful. Repeating the same pattern each month without fixing the behaviour can become stressful for some. If your income drops, you could be under even more pressure with the need to reduce spending accordingly.
- No wriggle room at the end of every month. You do not have the cushion to take any financial blows if you are in this pattern of spending. Good financial practice would be to have up to three months’ net income saved. This is your rainy-day fund for unplanned things like illness and redundancy. A fund will cushion you from these shocks. If you have a financial shock and nothing in the bank, that shock will be more damaging.
- Planning for the future like buying a house, or saving money is more difficult under these circumstances. Picture a couple seeking a mortgage or loan and this couple live month to month. One of the things a lender looks at is the capacity to repay and to repay under stress (higher interest rates, one partner losing income). There is an instant red flag if they see that the lifestyle creep is such that there is no capacity to repay a mortgage under a stress test. If there is nothing left at the end of the month the lender will not give you the loan. You need to show the capacity to repay. This is where a lender kind of protects you from yourself. Promising to make reductions in spending at this stage is too late. Damage done.
- Saving money, investing money, and providing for retirement is that little bit harder to commit to if you are in this pattern.
What can you do?
Itemise spending: This must be done at some level to bring your mind to focus. As mentioned, question your spending over and over again and think of alternatives to that spending or ways to reduce this spending.
Prioritise money goals. The first thing to do is to ask yourself what are your priorities with your money? Is there a goal that you want to reach? Defining this is an excellent first step in rewriting your financial path.
Examples of financial goals would be:
-
- Get debt-free.
- Save deposit for a house by a certain date.
- Stop spending money on credit cards altogether.
- Save 10% of salary each month.
- Reduce expenditure by 20%.
- Start a pension.
If you have a goal, as is it a higher priority than living paycheck to paycheck? If it is, you will action it accordingly.
Automate your finances. Structure the flow of money through your life to make it easier on you. If you have bills, savings, pensions, and any other priority payment you can think of, leaving your account the day you get paid, you will see clearly what you have left for your month. If you, on the other hand, do not have a system to channel payments, you are putting yourself in a position of stress. Leaving these payments lower down the priority list after you have spent on day-to-day expenses, means you might be under pressure to meet these payments. Remember, it is better to spend the leftovers after saving, rather than saving the leftovers after spending.
Say, for example, you wanted to save 10% of your salary per month. Which would be easier:
- Saving 10% of your income by setting up an automatic payment for payday?
Or
- Waiting until the end of the month and “seeing what is left” so you can transfer 10% to a savings account?
It is clear which would have more chance of success. Relying on willpower in this will not get the desired result. You will either find there is nothing left, due to lifestyle creep, or other priorities rear their head during the month, preventing you from saving.
There is one certainty and that is that if you do not take action you will not change your behaviour.
If you would like to speak about this or any other matter in confidence, take the offer of a free 30-minute introductory call with me to see how I can help you.
Morgan
