Living paycheck to paycheck isn’t a fun way to go about living. I remember when I was driving 35 minutes one way to make minimum wage at a part time job. Even though I was still living with my parents at the time and didn’t have many bills, it was nearly impossible to save any money.
Maybe you’re stuck in the hamster wheel right now. You can’t seem to ever get ahead financially and maybe even have a lot of debt. It may not seem like it now, but there is hope. With a few changes, you can turn your financial situation around for the better and never look back!
In this post, I’ll be taking you through the process of getting out of the paycheck to paycheck cycle and getting you on the path to financial independence with me.
First step: Press Pause
When you have some quiet time, take a minute to think about your financial situation. You’re in a bit of a crisis if you’re living paycheck to paycheck and it’s time to view it that way. I’m not saying you should be panicking necessarily, but if that’s what will motivate you to improve your money habits, then start panicking.
Pause any spending that isn’t absolutely necessary. Whether you’re panicking or not, pressing pause on excessive spending is the best thing to start with. It isn’t fun to only put your money towards bills, but it’s the best option at this point. It’s time to start putting things off today so that you can benefit in the future.
Figure out where you stand financially
You may not even know how much debt you have or how much money you’re bringing in every month. It might be a bit painful, but it’s time to add everything up and see how you’re doing.
- Start rounding up all your expenses and any debt you might have.
- Go through your bank account statements and see where your money is going.
- Look at your paystub to see how much money is coming in.
- Identify any regular transactions in your bank accounts that can be eliminated today and eliminate them.
- Compare your necessary bills to your income and see if you’re making enough money to cover them.
Create a plan for your money
Even if you aren’t making enough money to cover your expenses, the best way to set your financial house in order is to create a budget. Did I lose you? Still with me? Okay, cool. I know that budgets are the devil, but they can actually turn out to be fun when you get used to them.
A budget really is just a plan for your money. Right now, you’ll only be planning out how you’re going to get your money going to the right places. I think that Every Dollar is the easiest website/app to start budgeting with. Since you don’t have any extra money right now, I wouldn’t suggest the paid version. The free version is great though! You just punch in your income for each month and start filling out the categories with your expenses. I created a how to guide on budgets and if you need any help, feel free to send me an email!
Increase your income
If you aren’t making enough money to cover the necessities, you’re really in a crisis! It’s time to start coming up with additional income. Whether it’s working more hours at your job, or starting something on the side, you need to get at it now. Don’t stop working on getting your income up until you’re making enough money to cover your bills and have some left over. If you have anything sitting around that you aren’t using, sell it on eBay.
It’s going to take some sacrifice, but it will totally be worth it in the long run. I’ve been out of the paycheck to paycheck cycle for years now and I definitely don’t regret any social time I sacrificed to get in a good place financially.
If you don’t know how to make some extra money, I’ve got good news for you. It’s never been easier! There are thousands of side hustle ideas and here’s a great resource. Yes, there’s a website just for side hustles! That tells you how many opportunities there are out there.
Start saving money
Hopefully, once you get all of your numbers figured out and have a way to cover your expenses, you’ll start to have money left over each month. See there, that wasn’t too hard right? Okay, maybe it was, but it’s going to feel great when you start having some extra money.
You’re now considered to be living below your means, which is something we should all strive for. Once you have some extra money, you’re going to do something really fun with it! Put it in a savings account and let it sit. Okay, maybe that isn’t the most fun thing you could think of, but it’s the best option.
There are several routes you can choose to send your money down. There’s the worst option, bad options, neutral options, good options and the best option. Putting your money in a savings account when you’re trying to get out of the paycheck to paycheck cycle is the best option for your right now. It’s time to get used to putting money into a savings account each month and just let it sit.
Create goals for your savings
Putting money in a savings account just to do it isn’t the point. Now that you’ve got this money thing figured out a bit, it’s time to start thinking about what you want your money to do for you.
An emergency fund is just a savings account for a rainy day. Financial emergencies are going to come up. I can guarantee that. Setting aside a few thousand dollars to cover those unforeseen expenses is the first thing you should do with your savings. Again, it isn’t the most fun option, but it’s the best one.
When my wife and I first got married, we combined our savings and created a separate account just for emergencies. We certainly haven’t regretted having a friendly bank account with thousands of dollars hangout with us over the past couple years.
If you’re paying off a bunch of debt, I’d only put a couple thousand aside for emergencies. Once you’ve got your debt knocked out, you can bump up your emergency fund to cover several months of your expenses.
Pay off debt as fast as you can
If you’ve got any debt other a mortgage, it’s time to panic again. Any interest you pay on an asset that isn’t appreciating is money that you shouldn’t be spending. Even if you aren’t paying any interest on your debt, you need to get it out of your life. Each monthly payment is money you could be using towards things that are going to increase your wealth.
I’m not going to be getting deep into investing in this post, but if you took a $50 monthly payment and invested it in an index fund bringing 7% which is average, in 20 years, that $50 would be over $26,000. Think about what that number could be if you invested a lot more than $50 a month! See why I’m such an advocate of the debt free life?
Doing all the things I’ve mention in this post isn’t necessarily easy. You CAN do it though and it’s going to be worth it. Once you get out of debt and have an emergency fund in place, you can really start having fun with your money. I wouldn’t suggest you start spending all that you make again, but you can start budgeting things like vacations and the more fun things in life. You just make categories in your budget for the fun things, just like you would your bills, and start saving for them. You’re also ready to start doing my favorite thing to do with money – investing.
My wife and I have been fortunate to stay out of consumer debt and only have a mortgage on our house. We bought old cars that we could pay for in cash when we were still living with our parents and never upgraded them. We might not be impressing the neighbors, but the feeling of not having any debt is so much better than anything we could go into debt for! If our financial life didn’t improve any at all from the point we’re at right now, we’d still retire millionaires and we’re only making about $50k a year combined.
Nathan created Millionaire Dojo to document his journey to reaching a million dollar net worth so that others may be inspired to follow the same path. He and his wife reached a net worth of one hundred thousand by the age of 25 and has been featured on Business Insider. His blog focuses on practical advice that can be implemented immediately in the form of saving money, earning more, and investing to create passive income.