Living from paycheck to paycheck is not a good thing, but 59% of Americans do it, according to the 2019 survey on Schwab's modern wealth. You may think, "If my salary is just enough to cover all my bills, what's the problem?" The answer boils down to these potential negative consequences.
1. You will have no leeway for unplanned bills
When you live paycheck, you spend every penny you earn so that you wait for your next expense to stay up to date on your bills. You may be able to spend like this for a while without negative repercussions, but what happens when an unexpected expense occurs? Your car could fail and require a $ 700 repair. Your home could suffer damage that will cost you $ 1,000 to repair. Otherwise, you could hurt yourself and end up paying $ 1,200 in emergency bills and co-payments.
These are just a few potential problems that you might encounter, but the fact is that if you regularly spend your earnings in full, you will no longer have the means to pay extra bills. And in the absence of savings, you will have no choice but to go into debt to cover these additional expenses.
2. You will have no opportunity to save money
We all need savings for a number of different things – emergencies, retirement and college, to name a few. When you live paycheck, you lose the opportunity to save money for these important goals, which can put you at a serious disadvantage.
Imagine having an unexpected $ 2,000 home repair. Without emergency funds, you will have to charge this expense to a credit card and pay interest charges to have a balance. Similarly, if you do not have the opportunity to build a solid retirement, you may have financial difficulties during your good years, when you should rather enjoy this period of your life.
3. You risk to damage your credit score for years
As we have already mentioned, living with a paycheque exposes you to the risk of debt accumulation. Not only can debt payments eat away at your limited income, but they can also damage your credit. The more debt you have, the more likely you are to miss payments or be late, which can add to your score. Plus, using too much of your available credit at a time can also hurt your score.
When your credit is less than stellar, you risk being denied when you apply for a loan, credit card or other financing. And if you make succeed in being approved, it will usually be at a high interest rate which is more expensive for you.
Break the cycle
If you are ready to stop living differently, you can do some things to get yourself out of this rut. Start by following a budget. This will help you see where your money is going and from there you will be able to identify the recurring expenses that you will be easier to reduce than others.
But make no mistake: you will need to reduce your expenses to get out of this cycle. And chances are, it will be bigger expenses, like your rent or the payment of the car. Of course, smaller changes, such as downgrading your cable plan, will also help you, but if you want to significantly improve your financial prospects, you will probably need to reduce your expenses by several hundred dollars a month – and save that money in the first place. the place.
Once you have reduced your expenses, use your savings to build an emergency fund. This will give you leeway to cover the bills that you did not expect to pay, thus allowing you to avoid the debt and spinoffs that this may entail.
If you live check in check, the sooner you end the madness, the more you will have peace of mind. And that's reason enough to make positive changes that improve your financial situation.