What is Paycheck-to-Paycheck?
Paycheck-to-paycheck means a lifestyle in which a person does not save money and would incur significant financial stress if he or she does not receive his or her next paycheck.
How Does Paycheck-to-Paycheck Work?
For example, let's say John Doe's paycheck is $1,450 every two weeks, or $2,900 a month. His expenses are the following:
Car payment: $450
Student loan payment: $450
Credit card payment: $300
Cell phone: $75
Total expenses: $3,000
In this example, not only is John living above his means (his expenses are higher than his income), he is also living paycheck-to-paycheck. If he gets fired, has an emergency or his company closes in two weeks, he would have little backup.
Why Does Paycheck-to-Paycheck Matter?
It is not good to live paycheck-to-paycheck. Not only is it financially risky, it creates unnecessary stress. To avoid living paycheck-to-paycheck, John must reduce his expenses so that they are less than his income, and he should make regular, disciplined deposits into a savings and/or investment vehicle.