Living to paycheck to paycheck isn't a good thing, yet 59% of Americans do so, according to Schwab's 2019 Modern Wealth Survey. You may be thinking: "If my paychecks are just enough to cover all of my bills, what's the problem?" The answer boils down to these potential adverse consequences.
1. You'll have zero wiggle room for unplanned bills
When you live paycheck to paycheck, you spend every cent you earn so that you're waiting for your next payday to stay current on your bills. You might manage to coast by like that for some time without any negative repercussions, but what happens when an unexpected expense creeps up? Your car might break down and need a $700 repair. Your home might sustain damage that costs you $1,000 to fix. Or you might get injured and find yourself on the hook for $1,200 in ER bills and co-payments.
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These are just a few potential hiccups you might encounter, but the point is that if you regularly spend down your entire earnings, you won't have a means of paying for extra bills that pop up. And in the absence of savings, you'll have no choice but to rack up costly debt to cover those added expenses.
2. You'll 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 to paycheck, you lose the chance to sock away funds for these and other important purposes, which can put you at a huge disadvantage down the line.
Imagine you encounter a $2,000 unexpected home repair. Without an emergency fund, you'll have to charge that expense on a credit card and pay loads of interest for carrying a balance. Similarly, if you don't get a chance to build a solid nest egg for retirement, you'll risk struggling financially during your golden years when you should instead be enjoying that period of life.
3. You'll risk damaging your credit score for years
As mentioned already, living paycheck to paycheck puts you at risk of accumulating debt. Not only can debt payments eat away at your limited earnings, but they can also damage your credit. The more debt you have, the more you risk missing payments or being late with them, which can drag down your score significantly. Furthermore, using too much of your available credit at once can also hurt your score.
When your credit is less than stellar, you risk being denied when you apply for loans, credit cards, and other financing. And if you do manage to get approved, it'll generally be at a high interest rate that's costlier for you.
Breaking the cycle
If you're ready to stop living paycheck to paycheck, there are a few things you can do to bust out of that rut. First, start following a budget. It'll help you see where your money is going, and from there, you can identify recurring expenses you'll have an easier time cutting than others.
But make no mistake about it: You will need to reduce your expenses to break out of that cycle. And chances are, those will be larger expenses, like your rent or car payment. Of course, smaller changes, like downgrading your cable plan, will help as well, but if you want to see your financial outlook improve substantially, you'll probably need to trim your expenses to the tune of several hundred dollars each month -- and save that money instead.
Once you've lowered your expenses, use your savings to build an emergency fund. It'll give you some breathing room to cover bills you weren't expecting to pay, thereby helping you avoid debt and the fallout it can produce.
If you live paycheck to paycheck, the sooner you put an end to the madness, the more peace of mind you'll buy yourself. And that's reason enough to make positive changes that alter your financial picture for the better.
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