For many people, living paycheck to paycheck is just a way of life. Things are so tight that as soon as the paycheck comes in, the money’s going right back out again. While this may be a pattern that’s easy to get used to and may work for many people, the reality is that not having any excess cash on hand has many indirect costs that people don’t always think about. Just getting ahead by a little bit could end up providing opportunities to spend less money in the future. Here’s how:
- Payment Timing Penalties – Think about how many late fees you’ve paid over a lifetime and how much money that would add up to if you had it all back. If you just had some money set aside in an emergency fund or some excess cash each month, many of those fees would never have been assessed. For many people, this is thousands and thousands of dollars over a lifetime. With a credit card, for instance, not only is there a late fee for missing a payment, but there’s also interest on top of the amount owed. The same goes for many utility bills, mortgage bills and more. By simply having some excess cash to cover bills or unexpected expenses, all those fees can be eliminated.
- Flex Savings Account – This is one that people seldom think about, but since most Americans have to spend a fair amount of money on medical expenses each year, especially if they have a family, there are some opportunities to save money on annual expenses. One such move is contributing to a Flexible Savings Account (FSA). In essence, by contributing to an FSA you can deduct your medical expenses up to $2,500 per year. So, if you’re in a 25% tax bracket, that could save you up to $625 each year. But that only happens if you have the cash available each paycheck to dedicate to an FSA account. Someone living paycheck to paycheck never has the opportunity to proactively contribute and only pay medical bills as they come in – in full.
- Investing in Money-Saving Opportunities – Another way to look at a lack of cash is that it’s a lack of the ability to take advantage of money-saving opportunities. With excess cash, one could invest in anything from energy efficiency upgrades in the home (which save energy costs over the long-term) to spending more money to buy in bulk for grocery purchases. Over time, not investing in savings opportunities ends up costing hundreds or even thousands of dollars each year.