If there’s one financial situation that can affect anyone, regardless of income levels, it’s the cycle of living paycheck to paycheck. Someone who makes $250,000 and spends 100% of it each month experiences similar frustrations and pressures of someone who makes and spends $40,000 each month—low savings, no room for error, and a constant dread of financial emergencies.

Over 75% of American’s live paycheck to paycheck, which implies that 75% of Americans would be put into a dire financial situation should a paycheck not land in their bank account on the expected day each month.

When my wife and I were first married, we too lived this way. Bill payments would be delayed until our paychecks landed in our bank account, and it was a constant balancing act to coordinate the bill payments with the incoming money. At the time, we didn’t think there was anything strange about managing our money this way. But as we later discovered, breaking the paycheck to paycheck cycle is an excellent way to experience stress-free finances.

Let’s take a look at how to do this, as originally described by YNAB’s Fourth Rule.

First, determine your monthly expenses

If you’ve already developed an effective budget, this part is easy. You’ll need to add up all of your bills and expenses throughout a typical month in order to determine a Paycheck Buffer Amount. This should include the rent/mortgage payment, groceries, utilities, phone, cable and internet—anything that requires money to be available.

For some, this will make up a majority of your monthly income, and that’s okay. The goal here is to get a good understanding of your expenses each month and come up with a specific dollar amount. A good starting point is around $2,000 of spending each month for the typical household.

Let some of your income roll over into the next month

If you ever hope to get out of the paycheck to paycheck cycle, you’ll have to start living on less money than you bring in. This is critical to breaking the paycheck to paycheck cycle.

The next step is to let some of that leftover money each month roll over to the following month. It might be as little as $10, or as much as $1,000. Simply avoid spending this money, and let it build slowly in a Buffer category in your budget or savings account.

Repeat this process every month, and keep an eye on the Buffer. Over the next few months, watch as this amount grows from $10 to $100, $500, $1,000 and up. With that Paycheck Buffer Amount in mind, let the money build until you have reached your milestone.

Live on the Buffer

The months have passed, and you’ve finally reached the Paycheck Buffer Amount we estimated earlier in the post. Take this money and place it into your primary bank account that you use to pay your bills.

Now, take a look at your bank account. You’ve now broken the paycheck to paycheck cycle.

What you’ve done through this process is built up breathing room for your bank account. Because you’ve saved up a full month’s worth of expenses, you’re essentially living on last month’s income. There’s no longer a need to wait until the money hits your account before you pay the bills.

Now that some of the stress of paying bills is off your mind, what will you do to continue further enhance your Financial Journey?

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