What does living paycheck to paycheck mean? As Investopedia explains, individuals who “would be unable to meet financial obligations if unemployed because [their] salary is predominately devoted to expenses” would meet this definition. The primary identifier for a paycheck-to-paycheck financial situation is a lack of savings. Consumers can determine how closely to this state they live by imagining a hypothetical scenario in which they lose their primary source of income.
While living paycheck to paycheck keeps the lights on and food on the table, it’s not necessarily sustainable. It’s enough for the present—but it ignores the importance of envisioning your financial future. Even those diligently saving can benefit from taking a close look at future goals to make sure they are taking the best current actions to achieve them.
Andrew Housser, the co-founder of Freedom Debt Relief and CEO of Freedom Financial Asset Management, asks himself “Where do I want to be 1, 3 and 5 years from now?” Then he takes actions that will make it happen. This advice is applicable to consumers in any stage of their financial journey, from college students to retirees.
When you’re evaluating your financial future, pay attention to these areas in particular.
Building Your Emergency Fund
A single emergency can derail your financial routine. Life tends to be full of costly, unexpected events. Your car could break down. You could face a layoff. Perhaps you or a family member will experience unforeseen medical bills not covered by insurance. A natural disaster could damage your home. Since it’s impossible to predict the exact nature, extent and timing of emergencies, the only way to protect your finances is to plan ahead.
Many experts recommend saving three to six months’ worth of expenses for emergencies in a fund completely separate from your checking and savings accounts. But Suze Orman recommends saving eight to 12 months’ worth for true security.
Saving for Retirement
Retirement might seem a long way off, especially if you’re closer to the start of your career than the end. But thanks to the phenomenon of compound interest, it’s extremely important to start contributing money as soon as you can. According to NerdWallet, $10,000 invested for retirement with a 7 percent average return will turn into more than $76,000 over the course of 30 years. The sooner you start saving for retirement, the more it will grow. Take time to evaluate how much you’re contributing to your retirement fund now, so you can set yourself up for a secure financial future even after you stop working.
Adjusting Money Management Along the Way
There’s no hard-and-fast science for optimizing your money management strategy. But consumers who take the time to regularly check in and adjust on the fly tend to have better results than those who “set it and forget it.” One Forbes contributor recommends ensuring your savings goals are SMART:
- Specific
- Measurable
- Achievable
- Realistic
- Trackable
When you experience a life change, make sure you update your savings goals accordingly. For example, a raise at work means you should bump up your automatic savings contributions to reflect your new income. Having a child means you’ll likely want to start saving for college—and perhaps ramp up your life insurance policy. At certain periods throughout your life, you’ll be saving for specific goals: traveling, buying a home, etc. Following the SMART method will help you figure out how to act now to make future dreams a reality.
It’s impossible to understate the importance of envisioning your financial future in the present day.