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Are You Living Paycheck-to-Paycheck Without Knowing It?

September 2019

Are You Living Paycheck-to-Paycheck Without Knowing It?

What would happen if you didn't get paid for two weeks?  A month?  Would you immediately have to dip into savings or rack up credit card debt?

Many people who have moderate or even substantial incomes may be closer to living paycheck-to-paycheck than they think.  Several factors may mask how quickly the money would run out if you missed a paycheck or two. 

Living Off the Float

Do you pay for everything using credit cards?  How quickly do you get them paid off?  Even if you are avoiding interest charges by paying your balances in full each month, your credit cards may be giving you a false sense of security.  If you wait until the day your credit card is due to pay, you are still taking advantage of "the float," or the short-term loan of one month's worth of expenses. 

There is nothing wrong with using this extra time to pay, but it means you are spending cash three or four weeks ahead of when you receive it.  If you can't pay your credit card bill with what is already in your bank account, your next paycheck is already gone before you receive it.  If that next paycheck doesn't arrive, you would need to dip into savings immediately to pay for your previous month's expenses.

Lifestyle Creep

Are you living slightly beyond your means?  Making more money brings the temptation to indulge in lifestyle upgrades: a bigger house, a newer car, maybe expensive activities or private school for the kids.  It's easy to add a few hundred dollars to your monthly spending when you have gotten a raise or a bonus that makes you feel more financially secure. 

Little luxuries like eating out or having a landscaping service are easy to cut off if your financial circumstances change. However, car payments and mortgages are much more difficult to alter once you have committed to them. Unless you carefully monitor your fixed expenses, you may have less disposable income than you did before the big raise.

The Savings Shuffle

Do you sweep extra cash into your savings account?  Do you then pull money out of your savings to pay for routine expenses?  When you have an emergency fund or other readily available savings, raiding them can become a habit. It's all too easy to fall back on your stash whenever you overspend, rather than realizing that you've gone over-budget and that you need to cut back elsewhere.

Expenses for real emergencies should be infrequent, and your emergency fund replenished as soon as possible after the bill gets paid.  Shifting money in and out of savings can mask a trend of drawing down your savings to pay current living expenses.

A common misconception is that only people with limited income live paycheck to paycheck. In fact, all it takes is for you to spend money as quickly as you make it, even if it’s a sizeable sum. If you’re unable to build your savings because of excessive spending, it may be time to re-evaluate your financial habits.

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