How to stop Living Paycheck to Paycheck
Living paycheck to paycheck is the day-to-day reality for a vast majority of Americans. Money comes in, money goes out. Like clockwork. It’s almost as if your hand never actually touches the money. And before you know it, you become a thoroughfare... a mere transitory space for money to pass through.
Thus, your money never really stays for long.
You can’t build wealth off short-term money.
You have to always be thinking about the long-game.
You see, one of the traps of the paycheck to paycheck lifestyle is that you become saturated with short-term consciousness. And soon enough, you are living life caged in by a self-imposed limited perspective.
Before we get deeper, let’s first define what living “Paycheck to Paycheck” means.
On a basic level, when you are living paycheck to paycheck you are trading time (working) for money and then trading money to live. But ultimately the money goes into someone else’s bank account so you don’t actually see it.
That’s because when you are living paycheck-to-paycheck you are in one of two positions:
Your expenses are the same as your income. The amount of cash in and out are the same.
Your expenses are more than your income. This is a more dangerous place to be because there is likely debt involved.
In either case, every time you receive a payment it goes into someone else’s pocket instead of yours. And so at a point you have to ask, do you want to build your own dreams or fund someone else’s dream?
Of course everyone has bills in life. So we understand that bills have to be paid—it’s not about stopping paying your bills but finding a way for you to have some of your own money.
Truth: The average American lives paycheck to paycheck.
Question: Are you ok with living paycheck to paycheck?
If your answer is yes, stop reading.
If your answer is no, that you don’t want to be average and want to find a way out of this, please continue reading.
Listen. If you are living paycheck to paycheck, understand that this does not need to be your fate. It is a way of life, as you have learned to live it. Likely because the people around you also are too. You likely haven’t had anything other than this modeled for you.
If you haven’t, don’t worry. I’ve got you.
Here are a few lessons I wish I had as my financial foundation from jump.
#1 Pay yourself first
A lot of good, kind people, especially nurses have a habit of putting themselves last. When your life revolves around being in service to others, it’s easy to fall into that pattern in other areas of your life as well.
But money is one of those things, where it is critically important to put yourself first. Because it is a lifeline to your survival. Much like the oxygen mask that drops down in an airplane in the case of emergency. They tell you always to put your own mask on first, before helping someone else with theirs. That’s exactly how money works.
You can’t give from an empty cup. And if you always wait to give to yourself when the cup is dry, you will never be able to nourish your finances to be able to grow beyond the paycheck to paycheck hamster wheel.
If you wait until the end of the month to try and hopefully save what is “left over” you will quickly realize there will rarely be times when money is left over. Unexpected expenses happen all of the time. So how do we fix this?
“Pay yourself first” is a concept coined by Robert Kiosaki, author of Rich Dad Poor Dad. Essentially the lesson is to take money off the top every time you get paid, as soon as you get paid, even before you pay your bills, and deposit this money into a separate account for your financial goals (saving, investing, etc).
Once you have started paying yourself first, you can begin to use that money to create other streams of revenue (making your money work for you, instead of just working for your money). More on this in following sections (see #5 & 6).
#2 Build a winning budget
Next, we have to revamp your approach to budgeting. Essentially this is an extension of lesson one. But I wanted to show you what this can look like with real numbers.
According to Investopedia, the average American household makes $40-60k annually. If you are making $40k or more, when you add up your expenses you will more than likely discover that your monthly income is more than your base of monthly living expenses.
So let’s actually work some numbers here, and do the math.
For example, let’s be conservative and say we are working with a household income of $36,000 annually, after taxes.
From my experience working with many clients, the average household expenses, is around $2200 per month for everything.
Obviously this figure can vary alot between households, as each is working with different factors like debt, kids, living alone or with a roommate or spouse, personal health issues, elderly parents with illnesses, etc. All of these things change circumstances. But for the sake of this demonstration let’s say expenses are $2200 monthly.
So if you have 36K annually after taxes = $3000 monthly
If you deduct $2200 in expenses from $3000
You have $800 left over monthly ($3000 - $2200 = $800)
We call this leftover money discretionary income. In an ideal world, you would be able to save all $800 after bills. However in reality, I bet you won’t see that $800 at the end of the month.
Why is this? We can leak money in a lot of ways, without even realizing it’s happening. You don’t have to spend money on luxury items, to end up in a situation where you find yourself questioning “Why don’t I see any of this extra money?”
The answer is, many of us are spending this money little by little through the month that adds up to a large amount. Check out this article where I describe $20 purchases being the most expensive thing that you will buy. Subscriptions, forgotten trials, snacks, eating out, buying alcohol, smoking, clothing, buying a gift, self care, books, pedicure, beauty supplies.
If you spend $50 twice a week that’s $400 month - that stuff you got that you didn’t really need
How do we make sure we don’t do this? You can recapture the money that you are already making. First you need to decide what are your financial goals based on the income you have.
What are your financial goals for your long game and overall financial health?
What are your goals relative to saving, insurance, emergency fund, investment, down payments for house, travel fund, paying down debt, paying taxes, etc. If you need support to determine what your financial goals are, please reach out to us for a free consultation.
So, to simplify let’s say your goal is to save 10% of your monthly income.
Using our example of a monthly income of $3000, you would take $300 immediately off of the top and put that toward your financial goals, this is how you pay yourself.
So, when you get paid, pay yourself first.
Then pay your bills.
Whatever is left over is Fun Money. You can spend this money however you want because you have already put money aside for your financial goals and bills.
In this case $3000 income - $300 savings - $2200 bills = $500 fun money
Now, if you find you have a lot of fun money left over and you want to reach your financial goals faster, you can contribute more to your goals from this amount.
#3 Don’t go broke trying to look rich
Stop buying things you don’t need. It is age-old advice, to the point of it being cliché - but that’s because it works: Live within your means.
There is nothing more detrimental to building wealth than buying stuff you don’t really need. Especially when it’s for purposes of appearance, or as an attempt to demonstrate status to the outside world.
Flaunting material possessions to impress other people is a losing game—for your soul but also your financial health.
How do you look after your financial health? Stop buying things you don’t need.
Before you buy anything ask yourself “do I NEED this?” if the answer is “no” don’t buy it.
Now this doesn’t mean you can’t have fun with your money. It just means you have to budget for it properly.
But being 100 with you, if you are living paycheck to paycheck are you really in a position to buy things you don’t need? Likely not.
As a matter of fact, if you are living paycheck to paycheck you specifically shouldn’t be buying unnecessary things. And for goodness sake, do not go into debt getting things you don’t need.
One more time for the ones in the back!
Never go broke trying to look rich. This is so dangerous. If you’re buying things to look like you have more than you do, please stop it.
How can you tell if something is within your means? You should be able to buy it 3 times over. So for example, if you’re buying $200 shoes, but you don’t have $600 to spare, you can’t afford it.
If you’re buying a car, you should be making double in salary compared to the value of the car. So if you’re buying a $30,000 car, you should be making a minimum of $60,000 annually.
If you want to get out of living paycheck to paycheck, you need to stay within these guidelines.
At the foundation of this conversation is the reality that as a society, we need to transcend the mindset that we need material things to feel valuable. Because the truth is, value comes from within. It’s an internal thing, it’s not an external thing you can buy.
So stop trying to overcompensate for insecurities by dressing up your image in expensive things. It won’t solve your problem, and it will also keep you broke.
#4 Learn how to leverage debt instead of becoming prisoner to it
Debt can be a scary thing. Especially when you don’t know how to manage it, it can rob you of your freedom and your peace of mind.
But did you know that debt doesn’t necessarily have to be a bad thing? Did you know that there is such a thing as “good debt”? And that you can actually use debt to make money? This is what it means to leverage debt.
In order to engage this conversation we first need to talk about the concept of Good Debt vs Bad Debt.
“Good Debt” is the kind of debt that is used in a way that provides opportunities for making more money. Examples of good debt include going into debt to start a business, gain education, purchase property/investment property, invest in someone else’s business, or invest in yourself. Each of these things provide potential opportunities for generating a capital return.
Leveraging debt is going into debt for the sole purpose of using the capital to generate more money, and provide an increase to your net worth.
“Bad Debt” is the kind of debt that doesn’t bring you a return, and tends to be a result of buying things that you don’t really need. The items purchased also tend to depreciate in value over time. Using your credit card to go on a shopping spree for example, is definitely an instance of incurring bad debt.
Learning how to leverage debt is to learn how to strategically navigate the world of good debt.
To successfully leverage debt, the value of the return you get from the capital you gained from the debt, must be more than the amount lost to interest on the debt incurred. Because the purpose for the debt is to build more capital.
This is where your credit score comes into play. The better your credit score the more access you have to capital to create opportunities for making money. (We’ll have another article in the future about how to build your credit score)
Bad debt, affects us in many negative ways financially. Including that it hinders our ability to pay ourselves. So before you’re tempted to swipe that card on that fancy outfit or some other material possession, just remember it’s always a bad idea to be paying interest on a depreciating asset, especially if you didn’t need it in the first place!
#5 Build passive income
Now that you have some foundational knowledge on basic money management principles, let’s dive into the topic of passive income as a strategy for building wealth.
Passive income is money that is generated through some kind of monetary investment, but requires little involvement/labor/effort from the one who collects the income. Here are some examples.
Revenue from a rental property that you own but is managed by someone other than you.
Dividends from stocks, mutual funds, etc.
Interest on savings and other accounts.
Earnings from owning a business partnership in which you’re a passive partner.
Which means that you can leverage debt (strategy #4) to create your passive income streams. Cool, right?
However, if you have the cash, it would usually be wise to consider using that instead of just being in debt all the time.
Basically, this is what they mean by letting your money work for you. This is where you can begin to transition from trading time for money (living paycheck to paycheck), to trading money for money. At this stage, you are using your money to get your time back.
If you’re saying "Well, I don’t have money just sitting around like that!"
Ok, that’s fine. Go back to #1 and put in the work until you do!
#6 Build residual income
People often confuse residual income and passive income.
Here’s a simple way to distinguish between the two. One takes money (passive income), the other takes work/time/effort (residual income). They both eventually lead to income that doesn’t require much maintenance from the person collecting it, once a system has been set up.
Residual income is revenue generated from something that you have put in work to create initially, but that continues to provide revenue after the completion of labor into the future.
Collecting royalties from a song or a book you wrote.
Money that comes from successfully recruiting team members inside of a multi-level marketing system.
Creating an online product that lives within an evergreen funnel.
If you don’t have the capital or credit to start building your passive income streams through monetary investment opportunities, you always have your two hands, your mind, and your will. If you don’t have the money, you always have the option to put in the time and the effort it takes, until you do.
Stop making the lack of capital your excuse for settling for a life of scarcity.
You have a choice.
#7 Check your Money Mindset around scarcity, security, and abundance
Are you happy? More specifically, are you happy with the work you are doing to earn an income? Or do you dread going to work everyday?
If you feel that you need to stay at a job you hate, I would like to ask you to think about why - and reconsider how true this is. Maybe you are allowing yourself to feel more trapped than what you actually are, because of the narrative you have around money and your relationship to it.
The truth is that a sense of security is something that lives in your mind.
At the root of most people’s issues with money are the emotional attachments they have to ideas around money. Your mindset around money defines your relationship with it.
What are your underlying beliefs about money?
Scarcity is a mindset. Abundance is also a mindset. Where you put your mental energy has a huge impact on your financial health.
Living paycheck to paycheck is also a mindset - a place where you can feel trapped, like you can’t get out.
As humans many of us stay in unhappy situations because we are fearful of not having stability and security. This also applies to relationships with people in our lives.
But the truth is, if you are unhappy it's UP TO YOU and YOU ONLY to change that. You are the ONLY one who can change it. If your current mindset is “I won’t be able to find something better” you need to readjust your way of thinking and transition that thought to “I know I have the power to seek something better.”
If you’re working forty hours a week for minimum wage - you can complain about it, or find something else. And there are very few things that are worth minimum wage
My point is, don’t just settle for what is not good for you out of fear.
I know, it’s very challenging to break out of the paycheck to paycheck mindset. But if you are unable to break the belief that you deserve better, you will never be able to get out of the funk.
Just don’t let fear stop you from TRYING.
There are many ways to transcend the paycheck-to-paycheck lifestyle. The easiest way to get out is obviously to make more money.
But making more money doesn’t have to mean trading more time for money, especially if you are already working full-time. As a matter of fact, I know plenty of people making six figures who are still living paycheck to paycheck, so just trading more time for more money is not really the cure.
Instead, you can use the strategies presented in this article as a place to start. In short:
Have financial goals.
Start saving effectively and consistently.
When you build up some saved capital, find avenues to invest in passive income streams for yourself.
Or spend your time creating something you enjoy that may provide you with some residual income.
Either way, BUILD SOMETHING that will bring you income.
Final thoughts for you to remember: live below your means, and be wise with your money. Save diligently. And look for opportunities to leverage your money (or someone else’s money) to create a financial return. Strive to get to the place where your money makes more money
You have the power to get yourself to a better place financially.
You have the ability to get out of living paycheck to paycheck.
Stop making excuses, and take action.