6 Tips for Dealing With Inflation While Living Paycheck to Paycheck
As inflation and the cost of living continue to climb, more Americans (and more freelancers) are starting to feel the strain on their bank accounts. According to a recent LendingClub report, 60 percent of Americans were living paycheck to paycheck as of August 2022.
High-income taxpayers haven’t escaped the pressure either. LendingClub also found that almost half (45 percent) of six-figure earners also reported living paycheck to paycheck.
If you, like many Americans and freelancers, are stressing about finances during high inflation, it can be easy to start spiraling. While there is no quick fix, there are likely some small steps you can take to help get your finances in shape.
Here are our top tips for those struggling to break out of living paycheck to paycheck while also dealing with inflation.
1. Come up with a simple spending plan
Creating a budget can be intimidating, especially if you live paycheck to paycheck.
Instead of tracking every cent you spend, try a simpler form of budgeting, like the 70-20-10 rule.
In this financial plan, you allocate 70 percent of your income to necessities and living expenses (mortgage or rent payment, groceries, bills, etc.). The remaining 20 and 10 percent you can choose based on your situation. For example, you could allocate 20 percent of your income to paying off credit card debt and 10 percent to saving or investing if you can swing it.
If your necessities equal more than 70 percent of your income, that’s fine too. You can make it 80 or even 90 percent if you need to. But you may be surprised how much money is left over once you add up all your needs and weigh them against your income.
2. Strive for a lower tax refund
While it may seem counterintuitive initially, striving for a lower tax refund means you’ll have more of that refund money in your paychecks throughout the year. A tax refund is simply a refund of tax you have overpaid, so not overpaying in the first place is ideal.
A little extra cash in your monthly wages can make a big difference for someone living paycheck to paycheck.
To ensure you don’t overpay your taxes, you’ll need to adjust your W-4 withholding, which tells your employer how much tax to take out of your paychecks. TaxAct® makes this easy for you with our W-4 calculator1 — just answer a few questions, and we’ll complete a new Form W-4 for you to give your employer.
3. Revisit your subscription costs
Subscriptions have replaced cable bills for many of us. Sometimes these monthly fees seem small, but they can take up a hefty chunk of your budget when added together.
Add up all your monthly subscriptions and see if you can make some cuts, like unsubscribing from one streaming or other entertainment service.
Another area you could look at is your phone’s data plan. Are you paying for data that you don’t even use? If so, it might be time to change your plan.
4. Sell unused household items
Do you have unused or unwanted items lying around your home? It might be time to do a belongings audit to determine what items you actually want and need.
Look through your closet, kitchen, or garage and set aside items you rarely or never use. Online marketplaces are a great way to sell unwanted stuff, and you might be surprised what people are willing to pay for your things. Give it a try and see what happens — you can always donate the items that don’t sell.
Remember that profits from personal item sales are considered capital gains and should be reported to the IRS accordingly. However, this only applies if you sold the item for a profit. If you sold the item for less than you paid, you aren’t on the hook to pay taxes.
5. Take a look at your spending habits
Take some time to really think about where your money is going. Are there areas where you can take steps to save a little more?
Inflation and current events often affect the price of certain items more than others. For instance, eggs were an item that saw high price increases in 2022 due to a deadly avian influenza outbreak. Knowing this, you could strive to cut eggs from your diet as much as possible until prices cool off a bit.
The same is true for any grocery items taking up a big chunk of your budget. Can you try to eat more plant-based foods while meat prices are high? Can you switch to generic brands instead of paying for brand-name items?
Utility bills have also been on the rise — can you think of creative ways to cut back on daily electricity usage? For example, you could try unplugging items that aren’t in use, switching to LED bulbs, letting clothes line-dry instead of throwing them in the dryer, or using ceiling fans instead of air conditioning when possible.
While small on their own, little changes like this can add up to additional money in your checking account over time.
6. Open a high-yield savings account
Even if you can only put away $10 a month, you can grow your savings or emergency fund faster by placing your hard-earned money in a high-yield account.
As of March 2023, some online banks offer interest rates of 4 percent APY or higher — much more than the national average of 0.23 percent. Placing your money in a high-interest account allows you to earn more simply by stashing cash away.
APY stands for annual percentage yield. It’s a way for banks to say, “This is how much interest you can earn on your account compounded in one year.”
For context, say you put $100 in a high-yield savings account with 4 percent APY. You also put $100 in a traditional savings account with 0.25 percent APY. Assuming the interest is compounded annually, you’d end up with $104 at the end of the year in the high-yield account and only $100.25 in the traditional account.
While it might not seem like a lot in this example, it can make a big difference when you’re able to stockpile more money in your savings. For example, if you saved $10,000 in the scenario above with the same interest rates, you’d end up with an extra $400 in the high-yield account and only $25 extra in the traditional account.
It may seem impossible, but making little financial tweaks here and there can save you money in the long run. And when you’re living paycheck to paycheck, even saving yourself $20 a month can make a difference.