If you read the stats, you will learn that the average American has poor money management skills. In fact, even high income earners have poor money management skills.
The now famous Federal Reserve Report on Economic Well Being, nearly half of all households couldn't cover a $400 by the end of the month. Only two out of five household reported saving money last year, and most of those were high earners ($100K+). However, one in three households earning at least $75K reported living check to check.
If you're average, then you're living paycheck to paycheck. I don't say this to cause you to feel shame. Shame will only drive you away from inaction. On the other hand, a healthy dose of reality, hope and how to might help you turn away from the hand to mouth behavior.
This is a specific guide on how to stop living paycheck to paycheck. I've seen this method work on incomes below $20K all the way up the income scale. This is not a substitute for advice like "earn more", "spend less", etc. Rather this should be seen as a triage guide. A guide to get you from insolvent (or functionally insolvent) to solvent.
It's also a useful guide if you have a high networth, but you're facing a period of limited liquidity.
Step One: Unautomate Everything
If you're living hand to mouth, barely making ends meet, unautomate your finances. Consciousness is your friend in this battle, not your enemy.
Don't allow fourteen companies to auto-draft from your bank account if you don't know that you'll have enough money to buy groceries later this week.
This is surprisingly easy to do. I know because I just did it. I lost my wallet and called to report that I lost my credit/debit cards, and I received new cards a few days later. Since then, I've had to re-enroll my cell phone bill, my utilities, my health insurance and more. I recommend that you call your debit/credit card providers and let them know you have lost your cards too. In a few minutes of time, you've functionally unautomated a lot.
You might also have auto draft set up directly from your account or from your paycheck. Do everything within your legal authority to remove these drafts too.*
*These are my only exceptions:
Remove EVERY other form of financial automation.
Step Two: Create a physical record of all bills
I'm personally an electronic billing person, so I keep very few physical statements. However, for this exercise, you're going to need to create a paper statement. You can do this by writing the "Bill" yourself.
For example on one piece of paper write, "Duke electric company," and then Due: 9/26/2016 Amount $122.46
If you know the terms for late fees, it's nice to include those too. For credit card debt and other debts, write down the minimum amount required.
If you'll pay for something multiple times in a month (like daycare), write a seperate bill for each instance.
Write down all your bills for at least one month and up to six months if you've got some big biannual insurance bills due. Your bills include:
Step Three: Organize Bills by Due Date with overdue bills at the end
Now that you've written out every fixed expense on every piece of paper, organize them in chronological order by due date.
For example if your next bill due is your cell phone bill in 3 days, that's what should be on top. If your electric bill is in five days that's next.
Overdue bills need to go to the back. Usually, if your overdue on your bills (like water, electric, telecomm, etc.), but you can pay the ongoing amount, you'll be able to work with your provider to pay the back dues when you've got money.
If you're dealing with a situation where your utilities are already cut off, call your provider and ask what the minimum you can pay is to restore power, place the new minimums as your first bills due.
Step Four: Plan out your exact cash flow with bills due and expected income
This is the meatiest step. This is where the specific part of the guide comes into play.
Grab a calculator, a notebook or legal pad, and a pen or pencil.
On your legal pad create five columns (see below): Date, Reason, Income, Expenses, Balance
In the upper left corner write today's date, and in the upper right corner write your current bank account balance.
Now, grab your stack of bills, and find the first bill that is due. Skip several lines, and write down the date the bill is due, the type of bill (in column called reason), and the amount due. In my case, the next bill due is the Health Insurance paid on 8/29/2016, and Life/Disability insurance due on 8/30/2016.
If the bill is due in 10 days, skip at least ten lines. If it's due in 3 days, skip at least 4-5 lines.
Repeat the step above for every bill in your stack. Skip at least one line for every day of the month, but more like 2-3 lines.
Once that is complete, write in your expected income amounts, and the amount you expect to receive on the corresponding dates. (In my case see 9/1, 9/9, and 9/23).
Finally, add lines for Gas, Groceries, Kids activities, and other variable expenses. Add them to the day that you expect to spend money on them. For example, I expect to buy groceries every Thursday, so you'll see that I started with groceries on 9/1/2016, 9/8/2016, etc.
Now, that you have every expense, and every dollar of income accounted for, start totaling your balance in the balance column. When you have an expense, subtract it from your balance. When you have income, add it. Because banks are sneaky, I recommend that you subtract expenses first and income second when you have both on the same day.
If your balance ever gets to a negative point, you have to make a new plan. If possible, shift your variable spending around. In my example, I moved grocery shopping to one day later. Problem solved.
That might not be so easy in your case. You might have to decide, "What doesn't get paid?"
As far as it is possible, stay current on utilities, telecomm, work related transit and groceries. Everything else might go unpaid.
When deciding what not to pay, start by reviewing your variable expenses. Can you cut anything? What about your fixed expenses? Cut those things that can be cut without harming your family and ruining your credit. Your family needs to eat, but you may be able to skip one grocery shop per month by visiting a food pantry, and eating foods you already have. You can cut your cable. You can cut netflix. You can cut Amazon subscriptions, etc.
If you're still stuck, I recommend skipping debt payments in this order: payday loans, medical debt, and credit card debt. These debts are bankruptible, and they aren't backed by an asset.
Still need more money? Skip your rent. Here's a dirty little secret from a landlord, if you have to be late, rent is a good thing to pay late. Your landlord won't likely report it to a credit agency, and the eviction process takes a long time. Of course, you will need to get current as soon as possible, but rent is one of the easiest bills to shift in time. Daycare is another bill that you can shift by a few days (though usually less than a week).
I know that I'm advocating not paying bills on time. I'm sorry that this is the reality that you're facing. It will get better. This exercise puts you in the drivers seat.
Again, the goal of this process is to help you break the paycheck to paycheck cycle. What doesn't get paid is YOUR choice, and YOU will pay the consequences.
You may have many people with legitimate claims to your money. The point isn't to leave them high and dry. The point is to plan out your money, so that you can live within your means and direct your money as well as possible.
Once you've gotten to the point where you can regularly fulfill every legitimate claim to your money, you can start saving a buffer or paying down high interest debts.
On paper, a high income person should break the paycheck to paycheck cycle within a single pay periods. A low income person may require something closer to 3-4 months to get out from behind.
Step Five: Manually track every dollar that flows through your account
The previous step was the meatiest, but now you need to put the plan in action.
Get another piece of notebook paper, or a checkbook register. Within 5 seconds of spending money, write down the expense, and the new account balance. If you've got a spouse, they need, need, need to be on board. You will send texts every time. You have to agree on what will get spent.
You might need to put a few categories into cash to keep each other accountible.
If an unexpected expense comes up, then you need to rework your plan. If it's just an extra $20 co-pay, you might just reduce your grocery expenses by $20. On the other hand if it's an unexpected $400 car repair bill, you have to decide how to finance that as strategically as possible. You might add it to your credit card, but you do need to pay it off in the future.
Don't use an app. Don't depend on electronic bank statements. YOU need to do this. YOU'RE doing this to break the cycle. YOU'RE doing this because YOU'RE in control.
Step Six: Update the Plan OFTEN
If you're struggling, you might need to update your plan as often as every single week. Do you find that annoyingly frequent? Well, I'm sorry, your finances are in a world of hurt, and only you can solve the problem.
Once you've broken the paycheck to paycheck cycle, you'll have great financial habits in place that will allow you to be less hands on. For now, update the plan every week.
If you're carefully planning and carefully tracking, you'll be surprised by how quickly you become solvent.
You can do it!
Step Seven: Start working a financial plan
Once you've broken the paycheck to paycheck cycle, you still might have a financial mess on your hands. Breaking the paycheck to paycheck cycle is only the first step on your wealth building journey, but it helps you develop important habits.
The next steps you should take include saving an income buffer or paying consumer debts. If you need a specific plan, I recommend Dave Ramsey's Total Money Makeover for a crash course in personal finance.
I'm a wife, a mom, an employee, and a personal finance nerd who is devoted to spreadsheeting my way through life.