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Breaking the Cycle of Paycheck to Paycheck with a Personal Loan
We often hear about how scary it can be to live paycheck to paycheck. We hear about how important it is to break that cycle – to build up a bit of emergency savings. We know it’s scary. We know it’s important to find some extra in our monthly budget, but what many folks don’t know is how to do it. How do you break the cycle of living paycheck to paycheck? How do you stop chasing bills and start planning for them?
It can seem impossible when you’re caught in the cycle. You’re chasing bills, not budgeting. You need a new approach, but you can’t break a cycle simply by wishing. You’ll need to take a few steps to make it happen.
Get the Full Picture
Your first step is to document everything. Dig through your bills and your bank accounts. Where is the money going every month? Get a very specific idea of how much you’re spending and how much you’re earning. How much debt do you have? How much are you paying every month on credit card debt or high-interest payday loans?
You can’t come up with a new plan until you know what you’re working with. Try to separate emotions from the finances at this point. You just need to know about the numbers.
Make a Plan
Once you know how much you are spending every month, separate that spending into categories – what you must pay monthly and everything else.
You must pay your mortgage. You must pay your car note. You don’t actually need to pay for six streaming services or new clothes every week.
Your goal in this process is to break a cycle. To get ahead of your bills. That means you want to shore up your bank account so that when the bills come in you have the funds to pay them.
Basically, you want to get a full month’s income into your bank account as cushion before the next round of bills. Then you can pay the bills regularly and never wind up chasing them. You pay the bill on time, and your next paycheck refills the coffers.
So, your plan needs to be multi-pronged to reach your goal of getting a month’s income into the bank as a reserve.
Step 1: Separate spending and saving.
You are going to need two bank accounts, maybe three, to get control of your budget. One account is for paying bills. Another one is for emergency saving. The third is for your disposable spending. If you’ve been trying to run all your finances out of the same account, you often lose track of what you’re doing and how you’re spending, and you wind up in the hole every month.
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Set up a new checking account for your “fun money.” Send yourself a reasonable amount every month after you’ve run the numbers to find what you need for paying bills. Use this account to pay for the things you want, not the things you need. And when funds are up, they are up until next month.
Set up a new savings account to hold the money you’re going to be saving. If you are disciplined enough, you can also just leave your savings at the bottom of your bank account designed for paying bills.
Step 2: Consolidate and pay off credit cards.
The minimum payments on credit cards are likely a large amount of your monthly spending. Get ahead of them and pay far less in interest over time by taking out a personal loan with the intent to pay off the cards completely. You pay off the credit cards and then you start making payments on the personal loan. You’ll have set payments every month and when you’ve made all the payments, you’ll be done with that
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Step 3: Get extra with your personal loan.
When you apply for a personal loan to pay off your credit card debt, you may be surprised by how little you need to pay every month compared to how much you were paying for your credit cards. Since your goal is to simply get ahead your bills, you can make up the difference in a single swoop by applying for an extra $3,000 to $5,000 with your personal loan. Even with the increase, your monthly payment on the personal loan may still be less than your credit card bills.
You use most of the proceeds to pay off your credit cards. You add the new personal loan payment to your new monthly budget to replace what you were paying for credit cards. Then you take the excess personal loan money and put it in your savings account or leave it at the bottom of your checking account. Now you have a cushion and a bit of breathing room.
Step 4: Be smart with your paycheck.
If you have a variable paycheck or you are paid biweekly instead of monthly, it’s hard to feel ahead of your bills. Once you have your account flush with a personal loan, however, avoid the temptation to spend that money as “extra.” It’s not extra. It’s an advance on your paycheck.
Use the proceeds from the personal loan to pay this month’s bills. Consider paying them all at once if you can. You can send money to your “fun money” account at the same time. Your bills are likely a set amount – or close to it – every month. Once they are paid, don’t touch that checking account again until it’s time to pay bills again next month.
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In the weeks between paying bills, your paycheck is arriving and refilling your bill paying account. Then, when the next round of bills is due, send the payments, replenish your “fun money” account, and let your paychecks accumulate for the next installment.
Congratulations. You’ve broken the cycle of chasing bills.