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Escaping the Paycheck to Paycheck Cycle

By Insights Team on Feb 18, 2019

escaping paycheck to paycheck cycle

When you have a bill due, where do you look to pay? If you don’t have savings, you might find yourself with a tough decision. Do you go to credit cards to make ends meet or look somewhere else? But when you don’t have savings, where else can you look? That’s where PayActiv comes in.

According to the Federal Reserve, 40% of Americans can’t afford a $400 emergency from savings. 78% live paycheck to paycheck. If you are struggling, you are not alone. But you don’t have to stress about money forever. With the right tools and resources, you can avoid the worst pressures while paying the bills and set yourself up for long-term personal finance success.

What to do when strapped for cash?

If you’re short on cash, credit cards often appear to be the easy way out. But if you ask anyone with a history of credit card debt, there is nothing easy about credit cards after you swipe. With interest rates that often exceed 20%, credit cards may lead to a dangerous debt cycle where more and more of your hard earned money goes to interest every month.

Credit cards are a great tool for users who pay off their cards in full every month. When paid off in full before the due date, you don’t have to pay any interest. When you borrow from month to month, however, a monthly interest charge gets tacked on. If you only pay the minimum payment, it can take months or years to pay off your credit cards. You’ll pay a lot in interest for the privilege.

Avoid the costly credit card debt

Once you get stuck under a pile of credit card debt, it can be tough to dig out. Further, the monthly payment you owe may firm up your position in the paycheck to paycheck cycle we all work so hard to avoid.

Credit cards are typically a much better deal than predatory, high-cost payday loan, but that doesn’t mean they are free to use. By avoiding debt altogether, you are in the best position to avoid a paycheck to paycheck cycle.

If you owe $1,000 on a credit card with a 25% interest rate and make $50 payment each month, it will take you 27 months to pay off the debt and cost you $307 in interest. This is a common scenario for credit card borrowers. But it can get much worse than $50 per month and nearly one-third of your payment going to interest.

If you were to borrow $3,000 with your credit cards at 29% interest and pay $100 per month, you’ll spend 55 months paying it back. You’ll spend $2,406 on interest in this scenario. Not only does it take the better part of 5-years to get out of debt, assuming you don’t borrow any more on the card along the way. You also pay 45% in interest costs over the 55-month payback period.

Plug in your own potential debt scenario before grabbing a credit card using this handy credit card payoff calculator.

Tapping into money you’ve already earned

PayActiv offers an alternative to borrowing from credit cards or payday lenders. If you need quick cash before the bills are due, you can get access to wages you’ve earned without borrowing a penny of interest. PayActiv charges $5 per pay period for access to up to $500 in wages that you have earned but not yet been paid.

Because you’ve already earned the wages, you won’t ever have to pay anything back. If you can avoid the interest charges and fees that come with borrowing, you can turn your financial stress into savings and might even be able to get out of debt for good.

If a $5 cost helps you save hundreds of dollars in interest, that $5 is well worth it.

Create an emergency savings fund

In the biblical story of Joseph in Egypt, Pharoah was advised to save up during seven plentiful years and was able to help his people easily survive seven years of famine. Just like the Egyptians, you can save during the good times so you’ll have a safety net when tougher times come around. In personal finance, this is called an emergency fund.

Ideally, you should have at least three to six months of expenses in a savings account for a rainy day. You never know when a car will break down, a furnace or hot water heater will die, or a job loss might strike. With reliable savings standing by, you’ll never have to worry about missing a bill payment, even in an emergency.

Remember that late payments and missed payments can cost a lot. If you can escape from paying interest and fees, you can put that extra money into savings. Before you know it, you may have a week of savings, then a month, then a stable emergency fund.

Build a financial foundation for long-term financial health

Most everyone has financial stress at some point, but it doesn’t have to be a part of your daily life. If you avoid expensive, high-cost debt from credit cards, you’ll be in a much better financial position.

If you pay a credit card bill every month, consider how nice it would be to turn that expense into savings. If you can avoid credit card debt, get your loans paid off, and make your way to a debt-free lifestyle, you’ll be on track for much greater financial success. It doesn’t take any special knowledge to succeed in personal finance, but it does take effort. Start fixing your finances today for a great financial future.

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