Thursday, 21 May 2020

Living paycheck to paycheck: For many, this act of using most or all of your monthly income to cover your monthly expenses — with no money left over and none for savings — is a fact of life.

It’s actually more common than you think, and when difficult times arise, such as a layoff, illness, or an unprecedented emergency like the current coronavirus pandemic, it’s quite problematic.

What's your Plan B?

If your paycheck plummets and your savings run out, what is your next step? Could you borrow money from family or friends? Would you be able to take on the added debt -- and the added interest -- if you needed to use credit cards or revolving loans to pay expenses until things return to normal? Having answers to these questions will definitely make you more confident in handling a potential financial emergency.

How far are you from living paycheck to paycheck?

Only you can answer this question. If you are spending your entire paycheck to cover monthly expenses, you may find yourself close. Other factors to consider:

  • Do you have money in savings?
  • If you have savings, is it enough to cover your expenses for a month or two?
  • How quickly could you access the money you have saved?
  • Would you pay a penalty for accessing that money?

Want to be better prepared?

One of the biggest stressors during a financial crisis is the unknown. While you can't always anticipate how long your financial situation will remain in turmoil, you can take steps to ensure you are ready to respond:

Start saving now. It doesn't have to be a lot each month, but just getting started is a great first step. If you have the option, set up a direct deposit to a separate account. By paying yourself first, you eliminate the possible temptation to skip a deposit or two.

Pick the right place to save it. Keeping a certain amount of your savings easily accessible is a critical part of your emergency response. Investments and retirement accounts are a key piece of your overall savings plan, but they take time to liquidate and sometimes come with penalties. Look for demand deposit options like money market or traditional savings accounts that let you access your money whenever you need it.

Leave it alone. Your emergency savings should be set aside for just that: emergencies. If you are also saving to buy a car or make a down payment on a house, consider opening a separate account for those savings goals. This will ensure you have the money you need when you need it.

Protect your credit. While this isn't a savings tip, it is always a good idea to keep an eye on your credit score and do what you can to maintain it. Good credit can be a big help if your financial situation requires you borrow money or use credit cards to cover monthly expenses.

Though it may be impossible to protect yourself from unexpected financial emergencies, you can take steps to make sure you're better prepared. Look for opportunities to build and protect your savings, so you can remain in control of your financial future.

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