How to Stop Living Paycheck to Paycheck in 2021

Here's how to bust out of that unhealthy cycle.

If you live paycheck to paycheck, you're in good company. Many people have zero savings, and therefore zero leeway in paying bills until their next paycheck arrives. Not only is that a financially unhealthy way to live, it can also be stressful. You deserve better. If you're eager to break that cycle in 2021, here's how.

1. Get on a budget

Knowing what your living expenses actually cost is the first step toward getting your financial house in order. And to this end, you need a budget.

First, bust out your bank and credit card statements from 2020. Go through them to see what you spent money on last year. Tally and categorize your expenses and figure out what each category cost you on average. For example, if you had the same cable plan all year, you probably spent the same amount on it each month, whereas your electric bills may have varied. Aim to get a solid sense of what each bill costs so you can plan accordingly.

Next, list those expenses and costs on a spreadsheet. Or use a budgeting app to keep tabs on them. The key, either way, is to have everything mapped out in front of you.

2. Cut back on one major bill

Once you've got a sense of where your money goes each month, your next step is to identify one major cost you can cut. Doing so will help you build some savings so you're not stuck every month waiting for your next paycheck to arrive to pay your bills.

What expenses should you target? Don't be afraid to think big. If you're able to move to a lower-cost home without spending a lot, that's a good starting point. In some cases, that may not be possible. You may be tied to an area with expensive housing due to your job or your family's needs (for example, a specialized school your child attends). But if it's doable to, say, downsize to a smaller apartment that costs $300 less a month and borrow a friend's pickup truck to move for free, do it. Otherwise, look at dropping other big expenses, like a car. Similar to moving, this may not be practical for you, but if you live someplace with adequate public transportation, it's feasible and could result in major monthly savings.

3. Cut back on a few minor expenses

There are some expenses in your budget you may not have leeway with. For example, you need to spend a certain amount on heat and electricity to keep your home livable. But you can cut back on things like takeout meals (swap them for home-cooked meals) and entertainment (your $100-a-month cable plan can sometimes be replaced with a $15 streaming service). While slashing smaller bills won't have the same impact as cutting back on major expenses, when you're living paycheck to paycheck, every little bit helps.

4. Build an emergency fund

Having money in the bank is your ticket to busting out of the paycheck-to-paycheck cycle. Once you cut expenses in your budget, put that money into a savings account. Aim to eventually save enough to cover three to six months of living expenses. That way, you have funds to dip into if an unplanned bill arrives before your next paycheck. Of course, you also need to stick to your budget changes even when your emergency savings are complete. The key to not living paycheck to paycheck? Don't spend every dollar you earn. Until your income increases, get used to a lower set of expenses.

Living paycheck to paycheck is dangerous. It can result in piles of debt and stress. If you're ready to end that habit, follow the above steps. With any luck, you'll find yourself in a financially healthier spot when 2021 comes to a close.