How To Get Out Of Living Paycheck To Paycheck

Building wealth is difficult under the best of circumstances. If you’re one of the millions of Americans who are living paycheck to paycheck, becoming wealthy might seem completely impossible. I’ve been very open in the past about the fact that my finances as a young adult were a disaster. I wasn’t making much, and what little I made was getting spent faster than I could keep track. Assuming I had anything left over at the end of the month to invest, I wouldn’t have known where to even start.

The bottom line is everybody starts somewhere. If you find yourself currently living paycheck to paycheck, then this is where you start.

As a heads up, you should be aware that a lot of the advice for building wealth when you’re living paycheck to paycheck revolves around eliminating debt and cutting spending so that you have more money to invest. That particular advice might not apply to you—or you might consider those tips to be painfully obvious. If that’s the case, scroll past those sectios and I assure you we will get to the wealth-building good stuff.

You should also note that building wealth isn’t a matter of just doing one thing right—it requires doing a bunch of things right, and often in the correct order based on your circumstances.

Here are some tips to help you go from just getting by, to building real wealth. You may not need to use all of them, but using several in combination can only help your cause.

1. Budget budget budget

If you’re living paycheck to paycheck, every dollar you make needs to be accounted for. There is no room for rounding or approximations—not if you want to start building wealth.

Making a budget isn’t exactly rocket surgery, but it can be intimidating if you’ve never made one before. Budgets also catch a bad rap, as being “uncool”. I’ve definitely been roasted by friends when I reference my budget. I’ve also been met with scoffs when suggesting a budget to a friend who is struggling financially. I’m not sure why budgets are viewed as uncool, but ya wanna know what’s actually really cool? BEING WEALTHY.

Start by sitting down and totaling up how much you make each month from your job and any other side hustles or alternative income streams you might have. Then make a list of all your bills. Not just some of your bills. Not most of your bills. All of your bills.

Start with the most expensive stuff like rent/mortgage, student loans, medical bills, car payments, etc. Then move down to utilities, cell phone, insurance, cable, and the like. You should be writing down literally anything that you pay for each month starting with your housing costs, all the way down to your Spotify subscription. You’ll probably have to use some round numbers when it comes to groceries and gas, but do the best you can.

This should give you a pretty complete idea of what you make in a month as compared to what you spend in a month. How much, if anything, is left over? Write that number down, and move on to the next step.

2. Cutting expenses

Once you know where every dollar is going, the next thing to do is figure out what you can cut.

I’ve received feedback previously that my ideas on reducing expenses are too stringent and I shouldn’t discourage people from buying Starbucks multiple times a week or ordering the overpriced avocado toast at brunch because those small expenses “don’t make a real impact” when it comes to personal finance.

I simply could not disagree more. But don’t take my word for it. This is a topic that has been researched extensively and there’s even a name for it! It’s referred to as The Latte Factor and asserts that small expenses on convenience items like coffee can add up quickly—and if you had decided to invest that same amount of money instead, you could potentially have thousands of dollars of gains through the power of compound interest.

Of course, the opposite is true if you’re in debt. If you are actively paying interest on loans, the money you’re spending on small non-essential items is in theory costing you extra because that same amount could be put toward paying off your debt and reducing the amount of compound interest you’ll have to pay.

Disclaimer: I am not about harshing your vibe, shaming you for purchases, or robbing you of happiness. I would be lying if I said that I didn’t spring for a vanilla latte and some takeout a few times a month. However, I’ve built those items into my budget to ensure that I’m not overspending, and that I’m able to hit my target amount for savings/investing each month. If you’re truly interested in building wealth or reducing debt, cutting back on non-essential expenditures is something you’ll need to consider. I think that the narrative that small expenses don’t have a real impact on your finances is misguided at best.

The bottom line is that if you are trying to eliminate debt or build wealth, every single dollar counts.  

Below I’ve listed out a few tips for cutting expenses. Some of these tips might seem obvious, but for a lot of people who are struggling—these pointers may not have occurred to them. If you feel like this section is too elementary for you, or you’ve already cut your expenses to an acceptable level, skip ahead to section 4.

Housing

People in the U.S. tend to buy or rent more space than they actually need. In fact, one of the most popular articles TSR’s founder Steve Adcock has ever written is on that very topic.

This study suggests that you’re wasting a ton of home space.

The general rule is that your housing cost shouldn’t exceed about a quarter of your household income. So if you own a home that you can’t afford—the good news is that the real estate market is white-hot and now is a great time to sell.

If you’re renting a home out of your price range, it might be time to “right-size” to something more manageable.

Transportation

The average car payment for a new vehicle in the U.S. is $563 per month, which amounts to $6,756 a year. (Source)

The average loan term for new cars in the U.S. is 70 months, which would mean that the average purchase price is almost $40,000! I’m sure you already know by now that new cars depreciate significantly the moment you drive them off the lot—and then continue to depreciate as time goes on.

There are a lot of benefits to buying used cars. By buying a used car you’re potentially saving thousands by letting someone else take the initial depreciation hit, and you’re also not required to pay sales tax on the purchase if you’re buying it from a private party.

Some might argue that a used car will require more repairs and maintenance, which is true. But as long as you don’t get a total clunker, it’s unlikely that repairs and maintenance will amount to $6,756 over the course of a year. I do recommend putting some money aside each month for maintenance and repairs, and if you don’t end up needing it, you’ll have a head start on paying for your next used car purchase.

It’s highly likely that purchasing a used car will also reduce your auto insurance which could also lead to hundreds of dollars of savings.

Food & Beverages

After examining your credit card bill and taking inventory of where you’re spending, have you noticed any patterns as it relates to food, coffee, or alcohol?

Maybe you’re eating takeout a few times a week and could focus more on home cooked meals? Or perhaps you’re wracking up some huge tabs at happy hour and you could fare better buying a bottle for home? Whether it’s coffee houses, bars, restaurants, or fast food, take note of how much you’re spending and make a plan for how to reduce it.

When I found myself addicted to takeout, my action plan was three-pronged. First I watched approximately 1.4 million cooking videos on Youtube to get ideas for simple things to make that would (hopefully) taste as good as restaurant food. Then I would make a meal plan for the next week and a store list to go along with it. This meant I always had the ingredients I needed, and I was never left in my apartment with “nothing to eat”.

I’d set aside time on Sunday afternoon and I would meal prep by filling my entire BBQ grill up with chicken thighs. The beauty here was easy prep, and easy clean up. In about an hour and a half, I would have days worth of chicken that I could turn into multiple different dishes. Chicken thighs are versatile, so I’d be able to use the meat for tacos, burritos, rice bowls, sandwiches, wraps, etc. The best part was that chicken thighs are relatively inexpensive. I could eat 5 or 6 different meals for under $20.

Keep an eye out for what’s on special at the grocery store, and you could get an even better deal on other proteins that you’ll be able to prep in the same fashion.

Since I had so much food on hand that was easy to reheat, I got my takeout habit under control in a hurry. A little planning and preparation goes a long way toward saving money on food and beverages.

Recurring Expenses & Subscriptions

In the budgeting section you wrote down all your recurring expenses. Now that you have all of them in front of you, is there anything immediately jumping out that you could cut back on? Now that you’re taking a closer look, you might discover subscription services that are set to auto-renew that you’ve been meaning to cancel.

Maybe you don’t need Netflix, Hulu, Disney+, HBOMax, and Starz all at the same time? Or maybe you fully intended to go to the gym 3 times a week, but haven’t physically gone in 3 months? Perhaps you could live with the free version of Spotify?

I’m not saying cut back on everything that you love and sit at home on the weekends in a dark room until it’s time to go to work again. In fact, I think my Netflix subscription is a worthwhile expense because I don’t mind staying in and relaxing with a movie and I’m less likely to be tempted to find entertainment at a movie theater, nightclub, or restaurant. All I’m saying is to be honest with yourself when you take stock of what you can live without—and then ditch it.

3. Eliminate debt

Debt is one of the biggest obstacles people face when it comes to building wealth. Debt stemming from a mortgage is expected, but you should have a plan for tackling debt stemming from credit cards, student loans, medical bills, car loans, etc.

Hopefully, now that you’ve put a budget together and reduced your spending, you will have found some extra money that you can use to eliminate debt. We recommend utilizing Dave Ramsey’s snowball method where you identify your smallest debt, and put as much of your income as you possibly can toward paying that debt down while you make the minimum payment on your other debts. Once you knock that debt out, it’s time to start on the next one and repeat the process until you’re debt free.

If you’re still struggling with debt and need some guidance, this easy-to-follow guide will help you to budget and serve as a battle plan for how to get out of debt with low income.

4. Make more money

Oh, just make more money? Of course. Why didn’t I think of that?

I know it’s a lot easier said than done, but the truth is that it’s never been easier to start a side hustle, or find ways to make extra income.

Here’s a few strategies to consider.

Side hustles

These days when people think side hustle, Uber or Lyft are the first things that come to mind. And don’t get me wrong, Uber and Lyft are great side hustle options for some people depending on their geographic location and the population density in that area. I have talked to plenty of drivers in major metropolitan areas who are very happy with the returns they’re seeing.

However, people sometimes don’t take into account that when you’re driving for a rideshare company, wear and tear, fuel costs, and maintenance could be significantly eating into your profits.

It’s important to note that there are dozens of other side hustles that could potentially be more profitable with lower overhead. Luckily TSR has a wealth of knowledge regarding side hustles. Check out these articles for more ideas:

• An expert’s guide to side hustling
• 20 of the best side hustle apps for making extra money
• How I’m side hustling my way to financial independence
• How to make money playing video games
• Turn shopping into your side hustle

Ask for a raise

One of the quickest ways to earn more money is to get a raise, but we both know that’s not as simple as asking for a stick of gum. If you have any shot at having your request granted, you’ll need to be prepared to field questions as to why you deserve a raise in the first place.

Check out our full guide on how to ask for a raise if you want to put your best foot forward.

Learn new skills

With the prevalence of online learning platforms like Udemy, Skillshare, Coursera, and LinkedIn Learning, it’s never been easier to learn valuable skills from the comfort of your own home.

By learning new job skills you can either start a new side hustle, ask your employer for a raise due to the new value you’re bringing to the table, or use your skills to find a new job in a higher pay bracket.

Skills like web development, graphic design, copywriting, and search engine optimization are just a few of the types of skills you can learn that are in demand right now and could lead to a serious increase in your income.

5. Segregate funds

If you’re going to build wealth when you’re living paycheck to paycheck, you’ll need to be very intentional about keeping your savings somewhere that you won’t see every day. This can be a separate savings account, a brokerage account, bank CDs, or other savings vehicle, but the important thing is that you keep that money separate from the funds that you use to pay your bills.

Otherwise, you’ll find your spending starting to creep back up as you see your account balance grow, or you’ll suddenly find something to spend that money on. If you’re serious about building wealth, you gotta keep ‘em separated.  

6. Investing when you’re not already wealthy

If you’re under the impression that you need to already be wealthy in order to invest—that is undoubtedly false. There are several investment options for people who don’t have a lot of money to get started. You just need to some guidance!

Here are a few things to consider if you’re trying to get in the game without a huge bankroll.

Learning the ropes

If you’re going to invest, you should study up and know what you’re getting yourself into.

I know firsthand how intimidating that notion can be. It’s difficult to know where to start, and whether or not you’re even on the right track. That’s why I highly recommend Jeremy Schneider’s online investing course for building wealth.

In 8 hours of self-paced video tutorials, Jeremy will walk you through everything you need to know in order to invest confidently and achieve financial independence. The course is $79 for lifetime access and comes with a money-back satisfaction guarantee.

You can read our full review of Personal Finance Club here.

Company-sponsored retirement plans

If your employer offers a 401(k) contribution match, it’s something you should really consider taking advantage of because this is essentially free money.

Companies that offer this benefit will generally match contributions between 1% - 8% of your total salary, and I always try to take advantage of the full match.

*Of course, you’ll want to do your due diligence on the investment opportunities that are available to you within that account, as well as any fees associated.

Fractional shares

A lot of people are unaware that you can invest in the stock market for just $1.

At the time of this writing, the purchase price for 1 share of Amazon’s stock is currently $3,285.20. But with platforms like Robinhood, you can invest in Amazon (and most other companies) for as little as $1.

Buying fractional shares is how I dipped my toe into the stock market. I started with very small investments in $5 increments, and then as my portfolio grew—so did my curiosity and understanding of the market. I began seeking out more and more information and then my confidence grew enough to devote more of my income to investing.

Invest spare change

Acorns is a platform that allows you to get into the stock market with spare change.

The app rounds up your credit card purchases and invests that money on your behalf. If you’re looking to build wealth and don’t know where to start, Acorns is a great option for dipping your toe in.

Real estate investing

Did you know that you can invest in real estate without having to buy your own property?

Real estate crowdfunding platforms allow you to invest in real estate projects by sharing the cost with other investors. You can buy in for as little as $500. Check out our review of the top two real estate crowdfunding sites: Diversyfund and Fundrise.

You can also purchase Real Estate Investment Trusts (REIT) which give you interest in real estate and are traded just like stocks.

You can learn more about both options in our ultimate guide to real estate investing.

The bottom line

Building wealth when you’re living paycheck to paycheck can be very difficult. But, it gets easier once you right-size your budget and keep your debt to a minimum so that big chunks of your monthly income aren’t going to lenders.

Once you address your monthly finances, focus on making as much money as possible and keeping your savings separate from the money that you use for bills. Be persistent and stay focused on a long-term goal, and you can build real wealth over time, even if right now you’re just getting by.

The opinions expressed in this article are for general information purposes only and are not intended to provide specific advice or recommendations about any investment product or security. This information is provided strictly as a means of education regarding the financial industry.

Frequently Asked Questions:

How can I start building wealth if I'm living paycheck to paycheck?

Starting to build wealth when living paycheck to paycheck involves careful budgeting, cutting unnecessary expenses, and finding ways to reduce debt. Begin by making a detailed budget to track every dollar you earn and spend, identify non-essential expenses that can be reduced or eliminated, and prioritize paying off high-interest debt. These steps create a foundation for saving and investing even small amounts towards building wealth.

Why is budgeting important for someone living paycheck to paycheck?

Budgeting is crucial because it helps you understand exactly where your money is going and identifies areas where you can cut back. For someone living paycheck to paycheck, a budget ensures that every dollar is accounted for and helps in allocating funds more efficiently towards necessities, savings, and debt repayment, laying the groundwork for future wealth building.

What are some effective strategies for cutting expenses?

Effective strategies for cutting expenses include evaluating and reducing discretionary spending on things like dining out, subscription services, and luxury items. Additionally, re-evaluating major expenses such as housing and transportation can lead to significant savings. Opting for a smaller living space, downsizing to a more affordable vehicle, or buying used cars can drastically reduce monthly expenses.

How can I manage debt more effectively to build wealth?

Managing debt effectively involves prioritizing high-interest debt for repayment, using strategies like the debt snowball method, where you focus on paying off your smallest debts first while making minimum payments on others. Once the smallest debt is paid off, move on to the next smallest, creating momentum in debt reduction. This method frees up more money over time for savings and investments.

Are there any accessible investment options for those with limited funds?

Yes, there are several accessible investment options for those with limited funds, including:

Company-sponsored retirement plans with employer matching contributions, which can provide an immediate return on your investment.

Fractional shares that allow you to invest in high-value stocks with as little as $1.

Investing spare change through apps like Acorns, which rounds up your purchases to the nearest dollar and invests the difference.

Real estate crowdfunding platforms and Real Estate Investment Trusts (REITs) that offer a lower entry point for real estate investment compared to buying property directly.