A shocking 61% of adults in the U.S. live paycheck to paycheck. This means that every dollar you earn is spent when it comes in, leaving you waiting for your next paycheck to come to cover the bills.
Unfortunately, if you are spending all that you earn, you’ll never be able to get ahead financially by saving for emergencies or putting money into a brokerage account to grow your wealth. Here’s why it can be such a big problem if every dollar you bring in goes out of your bank account right away — along with some tips on how to turn things around.
Here’s why spending everything you earn can be a huge problem
If you’re spending everything you earn instead of saving or investing some of your money, you’re never going to get ahead financially for a few simple reasons.
First, many or all of the things you’re buying likely won’t hold their value. Things that you consume (like groceries) will do nothing to grow your wealth. The same is true for vacations, money spent on utility bills, or cash spent on dining out and experiences. Even tangible assets, like your car or clothes you buy, go down in value immediately after you purchase them. None of these purchases are assets that can help you develop financial security in the long run.
Second, you won’t have money working for you if you spend all of it. If you invest your money and earn returns, your money earns money, so you can grow richer without having to work for every dollar you bring in. This is called compound growth. But you need to have money to invest in order for compound growth to work for you.
Third, if you’re spending all that you have, you face a really significant risk of getting into debt if any bumps in the road happen. One survey from Pew Charitable Trusts found 60% of households had experienced a financial shock over the prior 12 months.
Some surprise expense is going to creep up on you at some point. If you’ve spent all you’ve made and don’t have money saved for emergencies, you could find yourself reaching for the credit cards when that happens. And then you’d get stuck paying interest — which would make it even harder to get ahead.
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The bottom line is, spending everything you have is a recipe for disaster. You’re not going to succeed financially if you do it and you’re setting yourself up to fail.
Here’s how you can stop this practice and begin to get ahead
If you’re currently spending all you earn, how can you stop it? There are a few approaches.
One of the best options is to increase your earnings. This can make a more meaningful impact than cutting spending, because you can only cut spending so much but can increase earnings an unlimited amount. It’s also harder to sustain big spending cuts than it is to keep earning more. A side hustle like driving for Uber could help, or you could start tutoring or selling crafts on Etsy.
You could also work on developing your job skills, or do your research by checking sites like Glassdoor to see if you’re underpaid and negotiating for a raise.
Another option is to cut a big fixed expense, perhaps by switching to a cheaper used car, finding a roommate, downsizing your apartment, or canceling a monthly gym membership. Making one big change can be easier to sustain than a lot of small ones.
Finally, you can try tracking spending for 30 days by writing down everything you buy. This can help you identify areas where you’re overspending, so you can make cuts.
By taking these steps, you may be able to stop spending all you earn. You can send some money to an emergency fund in a high-yield savings account and some money to investment accounts that can aid you in building wealth. It’s worth making the sacrifices necessary to earn the financial security you deserve.
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