When I realized I was living paycheck to paycheck I could hardly believe it. My first thought was I’m not poor, I can’t be living like this. I’m well off and by no means am I scraping together loose change to make ends meet. Despite my disbelief I was definitely living paycheck to paycheck and you might be as well.
Let me ask you a few questions: If you had an unexpected expense of, say $500 come up, that had to be paid today, would you be able to do it? Could you do it without a credit card? Could you do it without impacting your ability to pay your weekly/monthly expenses? Is your stomach turning in a knot and your palms getting clammy as you’re reading this? If you answered no to everything but that last one then you’re living paycheck to paycheck.
Wage Doesn’t Equal Wealth. Good wages, even great wages, don’t mean you’re financially savvy and certainly don’t protect you from living paycheck to paycheck. I learned that a good salary doesn’t build wealth; good budgeting does. I work in an industry where I interact with extremely successful people who make a lot of money through commission-based earnings. Some of them are very wealthy, while others, despite making as much money, are just a couple months away from a financial disaster. One I knew made a hobby out of buying Italian sports cars… then eventually lived out of one.
When I realized I couldn’t cover even a minor expense without using debt, I had just finished the most financially successful year of my life — which was a big part of my confusion. One year earlier I was newly married and renting a small apartment several blocks from a university campus. After a couple of months I realized that, for me, paying rent each month was like selling my soul… so I talked with my wife and we decided to set a goal of buying a house at the end of our lease agreement instead of renewing.
We implemented Dave Ramsey’s envelope system (I’ll talk about this in another article) and were able to aggressively save for a down payment, while building an emergency fund. By the time our one year lease was up we had a house picked out and were finalizing a mortgage. We chose a home where our monthly mortgage payment and utilities were equal to the amount we paid in rent and what we had been setting aside for a down payment. Our expenses didn’t change. Actually, we were closer to work so had even less gas money coming out of the budget, yet within a year — the same amount of time it took us to save up a down payment — we had maxed out and raised the limit on our credit card multiple times. At the peak of our finances spiraling out of control we had about $20,000 on plastic and $12,000 on a personal loan (that half served as a debt consolidation loan).
First, I should acknowledge that we underestimated the expenses of owning a home and the expenses tied to the two (rather large) dogs that we, as dog lovers, became the proud owners of during that time. Unplanned medical expenses, whether for a pet or human, are a great reason to have an emergency fund. Second, since we weren’t actively saving for something in specific we eased up on our budget. This may sound odd, but not having a financial goal was detrimental to our finances. Previously, we made compromises based on whether something brought us closer to a down payment and owning a home. Every penny had its place, but now that we had spare money in our budget, it got spent and over-spent to the point where it ate away the rest of our budget and ended with our expenses needing to be financed by good ole’ American Express.
It took some time to realize all of this and stop living paycheck to paycheck. We’re back on track now and have paid off over half of our aforementioned debt in about 18 months’ time. it wasn’t easy, we had to make compromises to accomplish our goals and still do. There were several minor setbacks and unexpected expenses that pushed our goal back, but we pushed past those challenges and are making great progress to reach our goal in the next 12 months.
Below are some of the key things I’ve identified that caused me and my family to live paycheck to paycheck, and what we should have been doing instead:
Follow a Budget
It may seem nominal but having a budget written out on paper or in a spreadsheet made a huge difference for us. Seeing exactly where every dollar is supposed to go has helped us make sure it goes there and gives the extra little push to stay diligent and not overspend.
Have a Clear Goal
I strongly believe that most of us want to be well off and financially stable… but that’s not a good goal. While you can look at any given week and determine if you are stable or not, it’s not quantifiable.
Find something you’re passionate about and work toward it. Your excitement will help you immensely. Whether it’s your first home, a new (or new to you) car, or a dream vacation, if you’re budgeting for something you desperately want it makes the compromises that much easier. You can even choose something more generic such as financial stability — but set a dollar amount to it. Examples would be to have $1000 saved in an emergency fund, or to have $5000 saved toward retirement this year, or always maintaining $500 in your checking account. Find a goal that you genuinely want and can track.
Acknowledge Your Weaknesses
Identify the things that make you willingly stray from your budget and be prepared to face them. Have a plan for when you are tempted to splurge. If needed, make some additional parameters for those expenses — just don’t make it a “if this happens” plan. It needs to be a “when this happens” plan.
One of the biggest weaknesses my wife and I struggled with was eating out… it’s probably more my weakness than hers, but it’s a struggle for us. One thing that helped us immensely when things were rough was having a set amount of cash for eating out. We decided that we wouldn’t use cards (debit or credit) to pay for restaurants and once the cash was out, no more Taco Bell until the next paycheck! Whether it be clothes shopping, dining out, entertainment, gambling, video games, smoking, drinking, coffee, or whatever else you determine to be a weakness, identify it and plan for it.
It’s crucial to not be too aggressive in your budget while working towards your goals. Initially, we were so lean in our budget and aggressively paying off debt that we often broke the actual budget! We’d pinch parts in one area to pay more towards debt… then needed to use a credit card to pay for expenses that were originally built into our budget. We also made the mistake of being too strict on something we had already identified as a weakness: eating out.
We had set aside $50 for 2 weeks which was almost always short. The excuse would be that we would have an unplanned outing with friends or family, or that we simply didn’t want to cook dinner that evening. Since we’d already put the spare money into debt, we would then have to use a credit card, and since we already broke the budget we continued to eat out. Now you can say that this was us caving on our weakness or not being strict enough with ourselves, but our choice was to maintain a certain lifestyle which ultimately, we under-budgeted. After a few months we added another $50 to the restaurant budget in an attempt to even it out. Through this balance, we found that we often had a small amount of spare cash left by the time our next paycheck came, despite actually spending less on dining out than when we would break our budget previously. Even though we put less money toward our goal each month, it ended up being better in the long run. Why? We were able to follow our budget better because it was more realistic. As an amendment to what I said about weaknesses earlier, identify your weaknesses and plan for them, but also be real with yourself.
These 4 steps will hopefully inspire and help you to take control of your finances. Please remember though that there are some who live paycheck to paycheck, and sadly Budgeting won’t help them — not because they’re incapable of it, but because they may be in a more difficult situation that budgeting alone can’t fix.
I believe that one of the greatest rewards of wealth is to help other people. Greed and a desire to build wealth are not the same things. If we’re not stable ourselves we can’t help other people and it is our responsibility to help others once we are stable.
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