If you are living paycheck to paycheck, how does that affect the hierarchy of savings? Is it possible to accumulate some financial security despite the lack of financial wiggle room?

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Posted by Olivia Woods (MONEY FORUMS: 4, Answers: 0)
Asked on May 4, 2016 12:27 pm
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Hi, Olivia! Thanks so much for writing. It is so hard today because so many people are living paycheck to paycheck…and it’s not for lack of financial discipline but rather that salaries have not risen very much yet housing in many places has. Additionally, many young adults have student loan debt that takes away a good chunk of their income. I don’t envy the tough row the millennial generation has to hoe…it seems much more rocky and weedy than it was for my baby-boomer generation.

I am sure you feel nervous and trapped in the cycle you’re in, and perhaps you’ve gone a year or two at your same job with little or no raise but with your rent going up each year. It’s hard to feel hopeful in that situation.

You ask such a smart question! There really is a hierarchy of savings as you call it – and one of debt repayment, too. With regard to savings, you want to create an “emergency fund” if you possibly can, even if it is a small one that grows slowly. An emergency fund is 3-6 months of expenses kept in an accessible, liquid account to pay for unexpected, un-planned-for events. If you are living paycheck to paycheck it’s hard to put any extra in such a fund, but if you can – even $20 a month – it’s good to do. Another key savings tool is if your company has a 401(k) that they match a percentage of your contributions. If you can manage to contribute enough to get that matching money, then it’s like you are earning a bigger salary.

Debt repayment is also subject to a hierarchy of sorts. If you can pay off your credit card debt and avoid incurring more, you rid yourself of interest payments of 22% or more. Payday or title loans can have interest rates of a 100% or more. Your mortgage, car loan debt, and student loan debt are at far more reasonable rates, so those types of debt cost you less. Of course you don’t want to miss any of the payments on any debt because doing so will reduce your credit score, but the faster you can pay off high-interest credit card or payday loan debt the better.

One thing to consider – is there any way you could maybe take a second job to earn a bit more money? My husband and I are 57 and 54 and throughout our careers we have always had at least two jobs – a main job and one or more on the side. Even if your career is not the type that lends itself to consulting maybe you could earn some extra money by baby-, dog-, or house-sitting or food service or lawn work. Having a second job brings in more money each month and reduces what you spend on entertainment because more of your hours are spent working. It’s a thought!

So, for a list of basic steps on how to gain a bit of financial security:

1. Create a budget so you know how much you earn and spend.
2. Set up a savings account for your emergency fund and save a little bit in it whenever you can.
3. See if you can find money to contribute toward your company 401(k) to get whatever match they provide.
4. Think about getting a second side job.
5. Try to minimize unnecessary expenses and purchases if you can, but you have probably already done that.
6. Consider asking for a raise at work if you haven’t gotten one in awhile. They won’t fire you for asking, and the most they can say is no.
7. Think about getting a new job. Unfortunately, changing companies is the best way to increase your salary.
8. Try to get rid of credit card debt and avoid incurring more. Pay off credit cards in full each month if you can.

Best wishes to you, and please write back if we can answer other questions!

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Posted by Kathryn Hauer (MONEY FORUMS: 0, Answers: 18)
Answered: May 4, 2016 2:06 pm