For many of us, the past few months have had us rethinking our finances in a big way. Perhaps for the first time, we're paying attention to what we're spending, how much we're making and our overall financial picture.
At a time when it is a blessing to even see a paycheck every two weeks, I want to talk about how we can set ourselves up now to still have money if we were ever forced to miss a payday.
In keeping with the mental health awareness month advice to read something other than COVID-19-related news, I recently read an article from MarketWatch.com that blew my mind:
Depending on the survey, from half of workers making under $50,000 to 74% of all employees [are living paycheck-to-paycheck]. Almost 3 in 10 adults have no emergency savings at all.
Even many in the upper class are seeing their six-figure incomes slip through their fingers. The Nielsen study found that 1 in 4 families making $150,000 a year or more is living paycheck-to-paycheck, while 1 in 3 earning between $50,000 and $100,000 also depends on their next check to keep their heads above water.
The above-mentioned article was written in January 2020—before the pandemic turned this economy upside down. So this isn't about the pandemic. This isn't for those who have been unceremoniously laid-off or furloughed or otherwise screwed on the job front in the past few weeks. This is about the way the majority of us working our regular full-time jobs have lived, currently live and will always live if not for a real intervention.
Living paycheck-to-paycheck simply means, each time you get paid, after covering your expenses, you have no money left over and no money in savings.
You do not have to live like this. In fact, grab a mirror and look at yourself (pull out your phone and look at yourself via the front-facing camera if you have to) then repeat after me: I. Do. Not. Have. To. Live. Like. This.
This plan will work if you're married or single, kids or no kids. As long as you get a regular paycheck that supports you until the next payday, you can do this.
It's not going to be easy, and it's not going to be quick, but here's how you can finally escape the paycheck-to-paycheck cycle.
I heard of this concept when I read "You Need A Budget" a while ago by Jesse Mecham, and his "age your money" idea stuck with me ever since. I tried it, and that's how I know this works.
First: Figure out how much you bring home each paycheck AFTER taxes (and deductions and whatever else comes out of your check). Look at how much you actually get deposited into your account whenever you get paid. If you share finances with a spouse or significant other, then you add this amount together.
That is your magic number.
Let's say you make $50,000 a year and get paid every other week. After taxes, you bring home about $1,500 every two weeks—less if you're paying for health insurance and/or contributing to a 401(k) (which you 100% should be contributing to a 401(k) if your company matches, but that's a conversation for another day).
For this illustration, your magic number is $1,500.
Second, open up a separate, free checking account. I recommend you open this at your same bank to make transfers both easy and instant. You want this account to be 100% free and have no balance minimum and no direct deposit requirement.
Next, figure out how much your biggest bill is each month. For most people, this is rent or a mortgage. Your rent or mortgage shouldn't be more than 25% of your take-home pay. So, with this illustration of making $50,000 a year gross and about $40,800 after taxes, in a perfect world, your rent wouldn't be more than $750. I realize that is LOW—even for Ohio where the cost of living is nothing like what we see in major metropolitan areas around the country.
(SIDE NOTE: If you're struggling to make ends meet and your rent is 50% of what you bring home, you're paying way too much and need to be honest with yourself that you cannot afford where you're living. Either get out of that lease/mortgage as fast as you can and/or find a roommate (or 10) to share the costs with ASAP.)
If your rent is $750+ and you get paid bi-weekly, you're probably used to paying your rent with the first check when you get paid and only having $750 left for the next two weeks. This means, you're either scraping together pennies by the following week before you get paid again, or you use your credit card to get you to the next check and then (maybe) pay the credit card off with your second check.
To stop living paycheck-to-paycheck! You need to remedy this aspect first and foremost.
Your FIRST savings goal is $375 (or half of your rent).
That's all you're trying to save. And you're going to save it in the new checking account you just opened up.
Where are you going to find the money? YOU TELL ME.
You can sacrifice a trip to Arby's—boom: $5. You can decide not to purchase that "Puff-N-Fluff Dog Dryer" on Amazon Prime—boom: $40 (yes, this is a real thing). You sell something on Facebook marketplace—boom: $10.You finally pay off your cell phone payment plan through Verizon and your bill is now $15 cheaper—boom: $15. Your aunt sends you $20 for your birthday—boom: $20 savings! You get $400 tax refund? You're ahead!
However you get this money, get it.
It might take a month to raise this amount. It might take six months. Doesn't matter. Every chance you get, you're throwing money at the new checking account until you have $375 saved. (You can automate these transfers and deposits or do it manually, doesn't matter.)
Once you have $375 saved, snap a selfie (#Blessed!) to commemorate the day you saved more than you ever thought you could, and you are on your way!
Now, when you get that first check, instead of sending $750 to your rent, you're only sending $375 and you're using the $375 you have saved to make up the difference. (Hey Google, insert the head exploding emoji!!)
This what you call BREATHING ROOM, and you've just given yourself a lot of it.
But you're not done! That $375 is gone and now your new checking account is (briefly) empty. But when you get paid the second time that month, you're going to put $375 into your new checking account. Then when you get paid on the first of the following month, you're going to combine $375 from that paycheck with the existing $375 you have in your new checking account (that you saved from your last paycheck) and pay your rent. And you will do this to infinity and beyond.
THEN you will set a new savings goal of $750 (or a full month's rent) and once you've raised that money, you will always be paying next month's rent with last month's money. If you don't increase your cost of living (i.e. buy extra crap on Amazon because you can), this new plan will leave you with extra money in your checking account after each paycheck.
Once you've saved enough to cover your rent every month, the magic number comes into play. Your new savings goal is $1,500 (or however much you bring home every two weeks).
Again, this is not quick or easy but it can be done. Even if it takes you an entire year to save $1,500, that's OK. A year is going to pass anyway. You can either make moves to be in a better place financially in a year—or not. Regardless, the time will pass.
This is not you paying extra on your debt. It's not a vague emergency fund. It's not saving $1,000 because that's a good round number. This plan gets you out of the paycheck-to-paycheck cycle FIRST—however much that paycheck is. Once you do that, then you can start focusing on other goals like emergency funds and debt payoff.
Some people will surprise themselves with how fast they can raise the money. Others will be working at it for a while.
But this is your new #goals: Do whatever it takes to save the amount you take home every two weeks, so you are no longer living paycheck-to-paycheck.
You didn't have to cancel cable or cut out Starbucks. You just have to replace your income with this extra savings (and be careful not to spend more money because you have more money).
This initial savings requires discipline and desire—both of which you have or you wouldn't be reading this article at all—and you definitely wouldn't have read this much of it.
You can do this! You've already looked yourself in the mirror and said so.
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DISCLAIMER: I’m not a certified financial planner/adviser nor a certified financial analyst nor an economist nor a CPA nor an accountant nor a lawyer. I’m not a finance professional through formal education. The contents on this site are for informational and entertainment purposes only and does not constitute financial, accounting, or legal advice. I can’t promise that the information shared on my posts is appropriate for you or anyone else. By using this site, you agree to hold me harmless from any ramifications, financial or otherwise, that occur to you as a result of acting on information found on this blog.