The step by step way of getting out of paycheck to paycheck

As of December, 64% of Americans were living paycheck to paycheck, according to a recent LendingClub report — up from 61% a year earlier and in line with the historic high first hit in March 2020.

Living P2P can be extremely frustrating

Not only financially, but there is a bigger toll on the mental side as well. Living p2p means every month, you have to figure out where to get the money to pay the bills. Even if the bills are covered, a month or two of overspending can bring back all the stress as the credit card balance keeps increasing.

Then you miss a payment and hit by high interest. A new game now starts called balance transfer and this is also encouraged by the credit card companies, taking each other’s debt and a bite at that interest. Some cards will provide a 0% interest period to entice the borrower into transferring the debt, thus hoping the borrower behavior will continue and they will eventually get to charge a higher interest rate than the previous card company.

A lot of this is built around personal finance behavior of people. The only time the consumer wins is when he or she gets out of consumer debt.

How to get out of P2P step by step

Getting out of P2P and into a cadence of personal finance is not easy for some people. It takes a bit of sacrifice and discipline, sometimes a lot more if you are a habitual or compulsive spender.

No, the solution is not as easy as spending less than your means. Of course, it means that eventually but the end goal cannot be the solution.

Here we go through a step by step process to get out of the paycheck to paycheck. The process somewhat accounts for the behavioral aspect of spending by restricting you from yourself.

Step 1: Assess your income and expenses

This is a first step any financial coach tells you to do. Take a stock of your monthly income and find your average expenses per month.

Finding average expenses per month is tricky since it varies for most people and families. Sometimes due to seasonal spending, the graph is not a smooth one.

The best way to estimate this is to account for the rolling YoY (year on year) total expenses. Take a few months as the sliding window and calculate the average. For example Jan-Dec 202X may show a different pattern than May-Apr 202X, because of the yearly variation and the lifestyle creep.

Once you have the average yearly number, divide by 12 to get an idea of your monthly average expenses. Do the same exercise with your income and see if the income > expenses.

Step 2: Capping your expenses

If your expenses are more than your income in the last step, you will need to stop using credit cards or at least use it very sparingly.

The reason is that it clearly shows you are spending more than you make.

But let’s say your expenses are less than income or you can identify the most important expenses that you want to keep.

Running p2p means you will have very little monthly slack, which is (income – expenses). The trick is now to fool ourselves to have at least 10% of our income as slack.

So from the beginning of the month, move away 10% from your paycheck (or the checking account) to a savings account. This savings account need not be harder to access (like an Emergency Fund) and preferably in the same bank. You will be required to transfer funds between the two accounts at short notices.

Now that you can pretend you only have 90% of your income, write down (or in a budgeting tool) what categories and how much you want to spend for your obligations (fixed expenses) and value (what you like to do most and which improves your life).

You will budget with the 90% money and keep track of your spending every week.

Step 3: Reach out only when you need to

Now that we have moved 10% of the money into another savings account and budgeting from our checking account, there will be a psychological shift in the way you approach spending. For most people, they will be tempted to access that 10%, but also feel happy if they don’t have to.

Thus we have not done anything more complex, but forced ourselves to just see some money sitting in our savings. Just at the sight of that savings, you will be hesitant to draw from it at the end of month to pay your bills or extra spending that was budgeted.

For first few months, it will be very common to reach out for this 10% and pay off the monthly bills, including credit cards. But slowly over time, it will teach you to manage your expenses within the 90%. After all, if you had earned only the 90%, you would have treated that as 100%, isn’t it?

Step 4: Grow that savings as your pride

As you start to control your expenses, you will be delighted to see how the 10% each month start adding up. Even if it is not earning anything, it will grow by ~10% contribution every month. In about few months to couple of years, you will have 1-3 months of expenses in the savings account.

I know 10% will take 9 months to cover even one month of expenses, but what we are stressing here is the behavior. This behavior will soon motivate you to start saving even more than 10% and this snowball will result in the 1-3 months of expenses worth saved up.

Once that savings has gathered some mass, move it to a distant (another bank) savings account as your Emergency Fund.

And now start all over again, keep saving 10% or more into the local savings account and keep running your engine (expenses) on the rest. By this time, you will be quite efficient in controlling the expenses and maintaining or growing the savings rate.


Through this method, we have demonstrated that it is not the math but personal finance behavior that will move a person out of paycheck to paycheck.

It achieves two goals with one process.

  • Controlling your expenses and taking a hard look at unnecessary expenditure. Also identify which expenses you value the most and can draw long term happiness from it.
  • Building up a savings habit with the side goal of achieving an emergency fund.
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