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6 Tips To Break The Pay-To-Pay Cycle

Did you know that the majority of North Americans live paycheque-to-paycheque? According to the Canadian Payroll Association, 60 percent of Canadians live the pay-to-pay cycle and cannot put money away for their retirement.

1. Be Wallet-Aware

Wallet-awareness is the first step to gaining control over your finances. Calculate your “set” monthly expenses, including rent, mortgage payments, transportation, bills, debts and the like. Calculate the average amount you spend weekly on food, including eating out and grocery shopping. Finally, calculate the average cost of fun and entertainment, as well as an average of your unplanned expenses per month. It is much simpler to decide what to trim away when you know what your costs are.

Tip: After housing and transportation, food is one of our biggest expenses, so planning meals ahead can greatly cut unnecessary costs.

2. Turn Budgeting Into A Sport

Add a new twist to breaking the pay-to-pay cycle by approaching it like a sport. Set goals, timeframes and rewards that will incite you to “win.” Planning a winning budget that also includes a reward system not only helps you evaluate your progress and set concrete objectives, but also acts as a warning system that helps you detect potential problems early on. The better track you keep of your expenses, the easier it will be to limit and prioritize your spending.

Tip: Your income has to exceed your expenses, so it will take a carefully planned budget to shift your pay-to-pay dependency and watch those paycheques grow in your bank account.

3. Pay Off Your Debts

The stress of debt is more than just a financial burden-it can lead to other stress-related complications. There is significant evidence that people with mountains of debt are more likely to report health problems. According to an Associated Press-AOL Health poll, the stress of owing money has caused many people to develop ulcers, become severely depressed, or even suffer heart attacks. One study showed that people who reported high levels of debt stress suffered from at least three stress-related illnesses.

Tip: The faster you rid yourself of debt, the sooner you can relax and enjoy your money. Double up on your credit card payments to help alleviate interest twice as fast.

4. Try The Envelope Budget System

The envelope (or jar) budgeting system involves dividing up the income you receive each pay period and placing it into different envelopes. Each envelope represents your different expense categories (i.e. groceries, utilities, entertainment, rent, mortgage, etc.). This is an especially helpful technique, as every dollar is accounted for, with a name and a place before it ever gets spent. If you run out of money in one envelope one month, you can either divert money from other envelopes-with the knowledge that you won’t be able to spend as much in those categories-or know that you’re done spending in that category until you get paid again.

Tip: If possible, put aside a little extra money in each envelope in case you ever owe more another month.

5. Automate and Invest

Most banks offer automated services for free, so a system that automatically diverts your money into savings, bills and investments will essentially take care of your finances for you. You may think you have no money to invest, but there is always a little room for financial growth. Contact your bank by phone and they’ll be able to put you in touch with a financial consultant that will give you advice on how to best invest your money. Even if it’s just small amounts to begin, you can put your money into RRSPs, high-savings accounts, or tax-free savings accounts, which collect interest as you save.

Tip: Try the old 10 percent rule as soon as you get your pay. Take 10 percent and place it somewhere where it will collect interest. Most of all, be sure it’s complicated to take out, so you will not be inclined to do so.

6. Carry Cash

Plastic is your enemy, so the best way to avoid spending money you don’t have is to carry the amount of cash you’ll need instead. With cash, spending more than you intend to requires extra effort. You’ve got to go to a bank or ATM to take more money out, then go back to the store to complete the purchase. For most people, this provides time to reconsider whether their budgets can handle any extra strain.

Tip: Take out the amount of cash you will need at the beginning of the week (which you have already determined with your winning budget) and spend accordingly.