How to avoid living from week to week
Living from one “pay cheque” to the next is something most people associate with people on low income – but the truth is that it’s easy to get into the habit of spending big when you first get paid, and living on a smaller amount of funds for the rest of the week or month. It’s something that affects many people, including the well off.
Dominique Bergel-Grant, founder and financial planner at Leapfrog Financial, says that it’s “incredibly, incredibly common,” and that the situation even occurs in households where both people are on six-figure incomes.
In 2010 Princeton University’s Greg Kaplan and Justin Weidner, and New York University’s Giovanni Violante studied the spending patterns of US households. Their research found that 30 per cent of them were living hand to mouth. Two thirds were “wealthy” hand to mouth – that is households with little liquid wealthy, but substantial holdings of illiquid assets, like housing or retirement accounts. “Poor” hand to mouth households were mostly young with low incomes, but wealthy ones were often older with high incomes.
In Australia, about 15 per cent of households were found to be living hand to mouth – but again, 90 per cent of them fell into the wealthy category.
This begs the question of how this trend became so prevalent. Oughton, consulting economist at super-fund-owned bank ME, explains, “Almost 60 per cent of people don’t budget, so they’re not sure where they’re heading with their finances,” he says.
Bergel-Grant believes that the habit had something to do with values we were taught as children. “I think we’re not actually learning the value of money and the value of saving – learning that you can spend some of your money today but you actually need to put some aside for future investment and some aside for future fun,” she says.
Rik Schnabel, founder of Living Beyond Limits, believes that people are working form a “move away from” mentality where they are driven by a fear of not having enough. It becomes a habit, then, that extra income doesn’t help with.
“What you earn doesn’t necessarily determine your savings capacity,” says Bergel-Grant. “It’s how you manage your money and treat your money when it comes in; it’s how you treat every pay rise that you get.”
1. Reacquaint yourself with cash
People on a monthly pay cycle usually find it harder to stick to a spending plan than those paid weekly. You can restore a sense of balance to your finances by giving yourself a weekly cash allowance. Have your salary paid to your savings account instead of your every day, then withdraw your allowance each week and only spend cash.
Have a look back on the last three months to see where your money has gone in the past. This will help you set a realistic allowance. Remember, it’s not about cutting back all your spending; it’s just about making sure you’re still saving. You can still factor in the spending that you enjoy – like a coffee in the morning.
2. Plan your spending
Be thoughtful about when and why you’re spending your money. Impulse buys are common, but add up to leave a dent in your monthly spending.
3. Expect the unexpected.
Oughton says that ME’s studies show a lot of people would struggle in an emergency.
Thirty per cent of people don’t have $1000 in savings and 18 per cent say they wouldn’t be able to raise $3000 in a week to cover an emergency.
You can reduce financial hell thanks to an unexpected bill by saving an emergency buffer. This should be about three months worth of expenses. Keep these savings in an account that you can’t access from an ATM.
4. Set a goal beyond survival
The key to this is thinking about your longer-term financial goals. When we look past mere survival, we shift towards a more expansive “move towards” mentality, says Schnabel. The goal may just be emotional stability, and aiming to feel in control of your money and having steady and balanced finances.
5. Reward yourself
“If you do meet your targets and your savings goals it is ok to give yourself a little bit of a reward to enjoy,” says Bergel-Grant. You’ll then be able to actually afford that splurge that you wanted.
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