Overcome Paycheck-to-Paycheck Living With 5 Money Moves
How I Lost A Job, Then Gained Wealth: Here's Your Blueprint for Escaping the Paycheck-to-Paycheck Life
Quick Story
In 2013, I lost a job and decided to start a company around my childhood passion: music. The problem was I didn’t have enough business experience to succeed. Without a clue on how to make it worth my time, I found myself in a war with depression that felt like I was sparring with an MMA fighter. For nine months, I kept getting choked out. I lost weight, my mind began to make an enemy of the word optimism, I picked up a few bad habits, and eventually, my dreams of success slowly dissipated. I didn’t have a stable job or income, so as you can imagine, my savings eventually became nonexistent too. By the end of that year, I’d finally had enough! I decided to go back to school and return to the tech field.
By the spring of 2016, I accepted my second job offer since I’d returned to work in software. It was an opportunity that doubled my income and allowed me to save more than I ever had. That year, I felt damn good about myself! I felt like the two-and-a-half years it took to restart my career finally began to pay off.
I should have doubled down on financial principles like savings and investing, but my thoughts were incredibly short-term, like most young adults in their 20s — so I bought a sports car instead. Sure, my income was steady, and those two and a half years of work were paying off, but it took me twice as long to pay the loan on that car. Actually, I spent almost five years paying $500 a month. And in case you’re wondering, that doesn’t include the $200 I paid for monthly car insurance.
$700 a month… for a car. With five years and a 10% return, I would have been sitting on almost $52,000 had I invested it. Instead, I was sitting in stylish bucket seats worth a lot less than the price I paid.
Here’s The Point
Every day, people make the same mistake I made back in 2016 — they spend more money than they can afford to spend. So, instead of getting ahead, they keep living paycheck-to-paycheck. The numbers are plastered all over the internet:
“Over 64% of Americans live paycheck-to-paycheck, including half of high-income earners who take home $100,000 or more.”
- cnbc.com
“In December 2022, 51% of people who earn more than $100,000 reported living paycheck to paycheck.”
- time.com
“Two in three Americans couldn’t cover a $400 emergency”
- bloomberg.com
The Million Dollar Question
Why do so many people, including high earners, live paycheck-to-paycheck? My belief might be unpopular, but you’re not reading this newsletter to get a typical opinion. Right? So, here’s my take:
We have two ends of the earning spectrum, and we’ll discuss both, but let’s start with the low end:
While spending behavior is important (we'll discuss that later), a more common concern of people on this end of the earning spectrum is that living expenses exceed their monthly income.
According to the California Franchise Tax Board, the average rent of a 1-bedroom apartment in my market of Los Angeles, CA, is $2,400/month, while the median monthly income is $2,993.75. That income might go a long way in some places, but living in high-cost U.S. cities like Los Angeles, Seattle, or New York can be challenging, even if you are budget-conscious. Consider the additional costs of utilities, food, clothing, transportation, and more — most people in this category find it almost impossible to save money they don’t have. And they have a point!
Although, as people move to the higher end of the earning spectrum, they still struggle financially. Years of living with poor spending behaviors and money mindsets have kept high earners in the paycheck-to-paycheck cycle. Unfortunately, many people in this category often believe that earning more will solve all their money problems. But that’s not true at all.
“In December 2022, 51% of people who earn more than $100,000 reported living paycheck to paycheck.”
- time.com
Contrary to popular belief, data shows that most people don’t get ahead financially when they earn more. Most people spend more and end up with even pricier problems. That’s called lifestyle creep. One of my favorite philosophers expressed this common problem in just four words: “Mo’ money, mo’ problems.” - The Notorious B.I.G.
How To Stop Living Paycheck-To-Paycheck
No matter where you fall on the earnings spectrum, here are five tips to help you get ahead of the usual money problems:
Your first priority should be creating a budget: I took this step seriously in 2014, and my life was never the same! If you need help getting started, I made a monthly budget worksheet to guide you. Click to download.
Lower your expenses: There are several ways to do this, but two of the most significant ways to lower your costs are:
Eliminate debt — especially credit card debt. You’ll save a lot of money on interest. I encouraged my wife to create a budget and eliminate her debt after we got married, and it drastically changed her view of money. Without a doubt, it’ll do the same for you.
Find less expensive housing. If you spend more than 35% of your income on housing, consider moving or splitting the cost with a roommate. I understand that moving and finding roommates isn’t for everyone, but your bank account will thank you if you can stomach it.
Save an emergency fund: The most common advice is to save 3-6 months of your expenses. But if you’re new to budgeting and saving, that might sound overwhelming. So, aim to save a few hundred dollars to get you started. I recommend $300 - $800. In most cases, this will keep you from using credit cards in an emergency.
Increase your income: When most people hear “increase your income,” they think of starting a side hustle, and there’s nothing wrong with that. But, the quickest way to earn more is to seek a higher-paying job. The average pay increase from a job change in California is 5.7%. So, if you can’t get a pay increase or promotion where you work, don’t be afraid to get out there and interview.
Live below your means: Creating a budget, getting out of debt, increasing your income, and saving are great, but the benefits won’t last if you don’t control your long-term spending. If you want lasting results, follow your budget and live below your means.
Pro tip: If you live with a partner, getting them on the same page will drastically speed up your financial progress!
A Word of Encouragement
I took years to develop new habits and commit them to my life. I still remember intentionally skipping family vacations and many other events while learning to discipline myself. It wasn’t easy! However, consistency has made all the difference in my life. I’m sure you can improve your finances if you remain consistent and disciplined. So remember, when it gets tough, keep going and trust the process!
-Earn Out Loud