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MM Note: The first step to starting your financial independence journey is to escape living paycheck to paycheck. It’s not as tough or as daunting as you think. This post is writing in collaboration with Erik Neilson, a freelance finance writer in Maine with a super gnarly bear.
In this post, I will share the exact strategy I used to escape living paycheck to paycheck. I also saved $16,520 in 12 months and will show you how you can too.
You and I know living paycheck to paycheck sucks. It’s hard to save. You run out of money. And for me, I worried all the time about having enough money to pay rent, pay my student loan payment, and stretch my paycheck long enough to make it to the next payday.
Escape living paycheck to paycheck.
It doesn’t take long to realize when you get your first job that your paycheck doesn’t go very far.
I got paid bi-weekly (so twice a month) and my first paycheck was for rent (living in a big city is super expensive) and my second paycheck was for my student loans.
Over 70% of my take-home pay was already spent before it hit my bank account. After taxes, I had about $800 to last me the entire month. Yes, I was already putting 15% of my pre-tax paycheck into my companies 401k, but I wasn’t saving any money to escape living paycheck to paycheck.
Nothing. I also slowly started to accumulate credit card debt when I couldn’t stretch paycheck #2 to the end of the month.
I constantly calculated (often wrongly) how I was going to allocate the money from each paycheck. I went to bed every night worrying about running out of money.
I was making a ton of money mistakes millennials make. Some people can fall back on their parents – but I couldn’t. If I ran out of money I had nowhere else to go. I needed to make a drastic change. I wanted to reclaim my life.
1 Year To Escape Living Paycheck to Paycheck
I created an account at Personal Capital so I could track my saving progress very closely for free. I linked all of my accounts and figured out that my net worth (assets – liabilities) was – $4,100.
So if I was going to escape living paycheck to paycheck I needed to get out of debt and save money.
It took me a little over 1 year to escape living paycheck to paycheck once I made it my number one life goal. I didn’t make my goal, but I was close! 381 days to be exact.
It was the greatest feeling in the world the day I realized that I had 15 full paychecks saved in the bank and didn’t have to worry about making my next rent or student loan payment. I escaped living paycheck to paycheck.
Here is exactly how I saved $16,520 in 12 months, which for me was 15 paychecks in the bank and my biggest step towards financial freedom.
8 Steps to Escape Living Paycheck to Paycheck
Are you ready to get out of the paycheck-to-paycheck cycle? Well, you’re in luck!
1. Automatically deposit your paycheck into 2 accounts
This is by far the best thing you can do to save more money. It changed my life. Talk to your human resource department and adjust the direct deposit of your paycheck. Most companies will allow you to take split your deposit by either % or $ amount into multiple bank accounts.
If you don’t have 2 bank accounts open a new one for this purpose.
I recommend opening an online bank account and NOT getting a debit card for it so you can’t easily take out the money. I personally use a high(ish) interest savings account at Ally as my online bank account and deposit 15% of my paycheck into this account. This forces you to save and makes it hard for you to get the money.
Honestly, I was a little extreme and I actually gave the password of my account to a family member I trusted so I couldn’t even log in to see how much money I had. If I hadn’t done that I would have just transferred it out. I need to be hardcore or I wasn’t going to save any money.
If you don’t see it you won’t miss it. Soon in 6 or 12 months, you will have saved a lot more money than you thought possible.
Note: A majority of companies offer direct deposit, but if you work for yourself or your company doesn’t offer this – then set up your bank account to immediately transfer a percentage of each paycheck to another bank account when you deposit it.
NET SAVING: +$310 dollars x 12 months = + $3,720
2. Find a side hustle and save 100% of the money (no excuses!)
The easiest way to stop living paycheck to paycheck is to find more ways to make money. I was only really able to escape living paycheck to paycheck when I started a consulting business. I made the commitment to save 100% of the money I made in my separate Ally savings account.
Seriously, every single dollar I made building WordPress websites or managing Google Adwords campaigns I put into a savings account. The first 12 months after launching my consulting business I made $7,000.
I also started signing up for local market research studies and focus groups – often applying for 50+ a week until I got one. Some of the market research firms ended up getting lazy and if you perform well in one focus group they start inviting you back for other similar projects.
I was able to make $2,100 sitting in focus groups over a 6 month period and most of them paid in Visa Gift Cards, which I could turn around and sell so I could get the cash to put into my savings account. Any extra money helps and it all adds up, as long as you are willing to hustle you can escape living paycheck to paycheck.
NET SAVING: + $9,100
3. Downsize immediately since rent is likely your largest expense
It really does take a sacrifice to escape living paycheck to paycheck, but you don’t have to sacrifice forever. When I got tired to living paycheck to paycheck I looked closely at my rent – which is the single largest expenses that most people can control.
I was paying $1,450 to live in my apartment that had a great downtown view but was draining my bank account each month.
I knew I could find an apartment to at least 50% less than sacrificing for at least 1 year would put me in a much stronger financial position. So I immediately found someone to take over my lease and moved into a studio apartment for only $800 per month.
Yes, the place the apartment was a lot smaller and not in the best area of the city, but I was saving $650 per month! Just because you are downsizing doesn’t mean you have to live somewhere forever.
NET SAVING: +$650 dollars x 12 months = + $7,800
TOTAL NET SAVING: $20,620 – $4,100 = $16,520
4. Take Inventory of Your Current Spending Habits
Many factors can influence someone’s inability to break the paycheck-to-paycheck cycle, but chief among them is not knowing how your money is actually being spent each month.
Most people, when asked this question, simply don’t have a clear answer — they only know roughly what they’ve purchased in a given span of time.
Fortunately, technology has made keeping a close eye on spending habits easier and less time-consuming than ever thanks to the various budgeting applications and software instances available today.
Don’t try to change anything just yet. Spend the way you would normally for a month — only then will you know what changes you need to make.
5. Reduce Your Monthly Obligations
Monthly bills certainly don’t make things any easier when it comes to saving money, but they can also be inevitable.
Between credit card debt, student loan payments, car insurance, and other expenses, entire paychecks are often funneled directly toward bills.
You’ll likely have to live with static monthly expenses like rent or mortgage payments, but any outstanding debt you can take care of as soon as possible will help to reduce how much of your income gets devoted to bills each month.
Getting by may be more challenging for a short period of time, but once you’ve eliminated some of your debts, you’ll never have to worry about them again.
6. Create a Conservative Budget
Writing-out a budget can be tricky work, especially when it’s your first time doing so.
The bottom for those attempting to break the cycle of living paycheck-to-paycheck is to create a surplus at the end of each month, which can then go into a savings account and left untouched for the foreseeable future.
This is your emergency fund, your savings for large future purchases and whatever else you need it to be — it will undoubtedly come in handy.
Of course, the hardest part is learning to live on a conservative budget for things like food, shopping, and entertainment. Challenge yourself, however, and the results will most likely pay off.
If you find you’re putting too many restrictions on yourself, ease up a bit until your budget becomes not only livable but without any discomfort involved.
7. Make Cost-cutting Lifestyle Changes
People often wonder how to spend less when attempting to cut their monthly costs, and unfortunately, it’s not always easy.
There are small things that can be done on a daily basis and add up to save you significant amounts of money each month, however, most of which don’t have to be painful or difficult to adapt to.
Instead of eating out for lunch regularly throughout the week, for example, pack lunch and bring it to work. Take a look, too, at any monthly subscriptions for media or other services you may not be utilizing anymore, and cut them off immediately.
Maintain this mindset, and your expenses will no doubt begin to fall.
8. Think Long-term
For those who have been stuck living paycheck-to-paycheck for years at a time, it’s important to accept the fact that overnight change is less than likely in most situations.
Breaking the cycle can take time, and if there’s one thing that often causes people to get off track, it’s losing sight of the end goal of living a more secure, comfortable lifestyle.
Wading through the initial stages can cause plenty of frustration, so don’t expect the ride to be without any bumps in the road. The trick is to expect these headaches, all the while knowing you’re making the right decisions for your financial future.
Don’t Live Paycheck To Paycheck ANYMORE
So don’t just assume that living paycheck-to-paycheck is a fact of life. Even if it’s all you’ve ever known, taking the right steps will help pull you out of the situation faster than you likely think.
It took me 381 days, but I could finally sleep at night.
Have you been able to escape living paycheck to paycheck? What strategies did you use?