Almost four out of five U.S. workers are living paycheck to paycheck. Most of us couldn’t cover a $1,000 emergency without going into debt. Over half of us never expect to get out of debt.

When you’re living paycheck to paycheck, you’re constantly worried about the next bump in the road. All it takes is a flat tire and you’re in crisis mode. Laid off? Furloughed? Global pandemic? You’re in a world of hurt, and it’s going to affect your health and relationships.

When you’re spending so much time, attention, and energy focusing on Survival, you have little left to put towards growth and self-actualization. You need to break the paycheck-to-paycheck cycle and figure out how to give yourself some margin.

One option is to raise your income. If that’s an option, do it, by all means. The rest of this will certainly be easier. If that’s outside of your control, don’t dispair. The problem isn’t about income, it’s about behavior. You can change behavior easier than you can change your income. As Charles Dickens observed in David Copperfield:

Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

No matter what your income is, you need to spend less than you earn, or you’ll always be living paycheck to paycheck. Think life would be a breeze if you made six figures? One out of 10 households making $100,000 or more is still living paycheck to paycheck.

You need a plan to break the cycle and never go back.

Face the Current Reality

Wherever you are, start there. Acknowledge that you’re living paycheck to paycheck and start budgeting that way. If you’ve never budgeted, you should try it. You’ll feel like you got a raise. Less money will leak out to impulsive expenses; more will go to work where you want it to.

Mentally take all the money you have and dump it into a pile in the middle of the kitchen table. This is what you have on hand. It needs to last you until the next time you get paid, possibly longer.

Start with the basic necessities of life:

  1. Put food on the table.
  2. Keep the lights on.
  3. Put gas in the car so you can get to work.
  4. Pay rent/the mortgage.

Once you have those needs covered, go through other upcoming bills, starting with the ones that need paid soonest. Allocate the dollars you have on hand to the expenses you have coming up.

At some point, you’re going to run out of money to allocate. If this happens before next payday, you have some tough decisions to make. Look for expenses that can be deferred, scaled back, or otherwise reduced to extend the cash you have on hand. It might be tight, but it’s better to know up front while you can still change your plans.

If you have enough money to last until next payday, congratulations! You’re on your way to breaking the paycheck-to-paycheck cycle. Now repeat the exercise. That next paycheck will add to the pile of money you have on the table. Assign those dollars to the expenses you haven’t covered yet. Do it again the next paycheck.

Age Your Money

Each time, you should have a little bit more money left over when the next paycheck comes. This means you can go a little bit further before you spend the money that just came in. Once you can make it to the next payday, you’ve broken the cycle. You’re no longer living paycheck-to-paycheck. You’ve given yourself a buffer.

There are two ways of thinking of this buffer:

  1. You have enough money on hand to last you for X days.
  2. The money you are spending today is money you earned X days go.

Both are valid. They mean the same thing. YNAB refers to this as the “age” of your money. The YNAB philosophy doesn’t recommend a specific age for your money, but your money should be as old as possible. That makes sense, if you think about it: when you retire, you’re going to live off of money that you earned years earlier.

The first milestone is when one paycheck lasts until the next one comes. Instead of having to use credit cards or float checks to tide you over until payday, you’re good. (Whatever you do, stay away from payday loans; they solve nothing and will only make a bad situation worse.)

Increase the buffer. Get to the point where the money you earn in July isn’t spent in July, it’s spent in August.

Take Baby Steps

Once you’ve broken the paycheck-to-paycheck cycle, you’re living on the money that came in last month. This isn’t an emergency fund. This is just stable cash flow. Now you’re ready to take the next steps.

Specifically, you’re ready to start working Dave Ramsey’s Baby Steps. Think of breaking the paycheck-to-paycheck cycle as Baby Step 0.

In Baby Step 1, you’ll start your emergency fund with $1,000. In Baby Step 2, you’ll get out of debt. In Baby Step 3, you’ll finish your emergency fund of three to six months of expenses.

There are four more Baby Steps, but these are the ones that are relevant to breaking the cycle of living paycheck to paycheck. With a fully-funded emergency fund, you’ll be able to weather most financial storms without losing any sleep. By getting out of debt, you’ll have more control over when (and where) your money goes out.

Pretty soon, you’ll stop paying attention to when payday is. You’ll make spending decisions based off of the budget, not your checking account balance. You’ll start looking further ahead, making plans for your money that reach further out.

Most importantly, you’ll stop stressing about money. You’ll spend less time focusing on your money (or lack thereof) and more time on the people and activities that mean the most to you.

Question: How long ago did you earn the dollars you’re spending today? Share your thoughts in the comments, on Twitter, LinkedIn, or Facebook.