Did you know that approximately 78% of people are living paycheck-to-paycheck, according to a Careerbuilder survey? Are you one of them?
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I used to be.
I grew up in poverty on the south side of Chicago, where we didn’t have much money or education surrounding this topic. In fact, fear surrounded any mentioning of money. It was taboo.
Until I started “adulting”, and soon realized that I had missed out on a lot! I didn’t know the basics about saving, investing, or budgeting- and I’ve got to admit- those lessons were painful.
I spent every dollar I made the moment it hit my account. I had more month at the end of the money, and I constantly struggled to survive. And then I discovered credit cards and racked up $31,804.21 of debt.
I found myself in a vicious cycle of rat race 2.0. Until I got tired and desperately needed to get my life on track for my family. That’s when I discovered how to manage my money, eliminate my debt, and make smarter money moves by reading a book called The Richest Man in Babylon.
It helped me understand that breaking the paycheck-to-paycheck cycle takes discipline and a plan. After crafting and implementing my own, I was able to take control of my money, annihilate my debt, and become financially free.
Here are 7 of my best steps toward having more financial independence:
1 Have a “come to Jesus” talk
It’s true. It’s never a good idea to dwell on the past. But in this case, looking back can be very beneficial. Why? Because getting out of the cycle of living paycheck to paycheck — and staying out — requires that you change the habits or circumstances that led you to get there in the first place.
Think about it… How did you get into this situation? Did you take out too many student loans without a plan? Or did you do what I did, and rack up mountains of credit card debt without a mission to pay it back?
Take some time to think about it and write it down. Start with jotting down three to five factors that contributed to your situation. What could you have done and what will you do differently in the future.
Important Note: It May Not Be Totally Your Fault.
Sure majority of people wind up living paycheck to paycheck because they overborrowed, overspent, or lacked education. However, this can’t be said for everyone. Many people struggle with medical debt after sickness, or debt that incurs during divorce, or loss of a job. And debt and loss have a way of sucking every cent out of your pockets.
I mean, it’s pretty easy to get into debt, wouldn’t you agree?
Taking the time to reflect on the things that led you into this cycle will help you recognize your mistakes so you can prevent the same thing from happening in the future. And if you have children, or will have them someday, these are valuable lessons to pass along to their family too.
2. It’s not about how much you make, but how much you keep
One huge lesson I learned on my journey to ending the cycle of living paycheck to paycheck is the importance of managing my spending.
Although I was making more money every year, somehow I was becoming broker by the day. I was racking up credit card debt, unnecessary loans, and taking advantage of every sale known to man.
This was when I had to come to terms with my bad spending habits. Let me tell you, it was tough. I had to come to grips with the fact that my poor spending habits were ruining my financial future for my two children and me.
I had to get rid of them.
It’s a fact that you do not have to make more money to live a financially stable life. You simply have to find out where you’re spending unnecessary money and redirect it into more prosperous places.
The first step to start controlling my spending was to pull my bank statements. I then started categorizing each transaction with a handy dandy highlighter and totaled up each category. This lets me know exactly where my money was going. If you don’t have a bank account, try a prepaid debit card so you’ll have a visual method of seeing where you’re spending your money.
Next, break it down into 5 categories
- Necessities (living expenses, rent, utilities)
- Food (groceries, fast food, restaurants)
- Transportation (insurance, gas)
- Debt (mortgage, car, student loans, etc.)
- Everything else
After adding them all up, if you notice you’re spending an abnormal amount of money in any category, look for ways to cut back on that particular expense.
For example, if more than 25 percent of your income is going toward entertainment or food, you should figure out how you can reduce it to 20 or 15 percent.
3. To Have or Have Not?
After you’ve highlighted the bank statement, next, you must go through each category and figure out what is a TRUE necessity and what is a luxury. Some examples of luxuries are buying meals outside for breakfast, lunch and dinner, cable, and unnecessary clothes. True necessities are rent/mortgage, utilities, insurance, gas, groceries. The rest is debt or “excess spending.
“I’ll admit, when I first did this exercise back in 2013, it was a bit embarrassing. Although my necessary bills were paid religiously, I was throwing away over $600/month on food because I wasn’t packing a lunch and going out every weekend. I had a closet full of clothes I hardly ever wore. I also had clothes with tags still attached. Not to mention, I was financing a vehicle with 26% interest.
Talk about throwing money away.
Nevertheless, this exercise helped me realize I had a real addiction to consumerism. I was working just to buy stuff that didn’t increase in value, nor could I pass it down to my children.
This is where the budget came into existence.
4. The “B” Word
Ahhhh, the “B” word- budgeting that is.
Budgeting is your way of being intentional about where your money is going. Because whether you realize it or not, your favorite stores have plans for your cash if you don’t. In order to do this, you will need to create four categories you’re going to direct your money.
- Giving (10%): Anyone that knows me knows that I truly believe that you reap what you sow. Whether it’s tithing or charitable giving, when you sow blessings into others, it will certainly return to you exponentially. It is a universal law.
- Savings (10%): This category is for true savings for emergencies. This includes medical, job loss, car problems, natural disasters, etc. Often times we save to take trips or buy a new TV. But, this category is NOT designated for that. It is for true emergencies only. Put this money into an account you cannot touch and forget about it, and let it grow.
- Pay off debt/ Invest (10%)- Credit card, car payments, mortgage loans, student loans, etc. are designated to this category. Because you’re paying interest on these payments, it’s best to attack this as aggressively as you can. If you don’t have any debt, designate that money somewhere that can help you grow even more.
- Living Expenses (70%): Necessary bills, groceries, insurance, and everyday expenses. This is what you live on. The great thing is you can always find ways to live on less than 70% of your income. If you’re able to get your living expenses down to less than 70%, hurray! Take that money and direct it toward paying off your debt faster or you can take a small percentage to plan something fun- like that vacation.
Creating an intentional spending plan ensures you don’t let any cents slip through the cracks. Make sense?
Back in 2013, I attended a seminar and met some very bright people. While we were sitting down talking over lunch, one of them stated something I’ll never forget: Decide how you want to live now, versus how long you want to work.
Meaning that if you spend everything you make now, you’ll have no choice but to work longer and harder. But, if you start investing in your financial future now, you’ll have many choices.
There are several ways to invest your money. And although I’m not an investing guru, I simply advise that you do your due diligence and come to the understanding that investing is not a “get rich quick” or overnight success deal. It will take time to build your wealth, so you can stop living paycheck to paycheck and live a life of financial independence.
But, if you start now, you can set yourself up to retire early, travel more, and spend time doing the things you really love.
It all comes down to choices. Will sacrifice a little today to have a better tomorrow?
6. Optimize your credit scores
If you’ve never heard my story, I used to have terrible credit. I’m talking to the tune of 545’s across the board. I couldn’t get approved for too much of anything, and it was downright embarrassing getting denied everywhere.
This is when I started my journey to better credit and raised my credit scores to 765 in 8 months using 5 bulletproof strategies. I talk about it more in this special webinar I did.
Long-story-short, if you follow these exact steps, you’ll be able to take your credit scores from wherever they are right now to make massive improvements- so you can buy your dream home, land the best deals, and upgrade your lifestyle.
Having excellent credit can save you a ton of money on interest rates, deposits, down payments, and more! Not to mention the travel perks, cash-back rewards, and security protection that comes with utilizing credit the right way.
If you’re not optimizing your credit scores already, start today! It will certainly be a way to gain the financial confidence you need to get out of the living paycheck to paycheck.
Like many people out here adulting, one thing we can agree on is paying bills can be time-consuming and demotivating.
Think about it… How much time do you spend a week paying bills? Too much!
This is why it’s imperative to start automating your finances and building a system around your goals of you finally stop living check to check.
That’s right, it’s time to start becoming besties with the autopay and recurring transfer option. I know autopay is a word people avoid like the plague but hear me out.
By setting up an automated personal finance system, you can start to dominate your finances by having your system passively do the right thing for you. It will help you manage your money, pay bills, and even make investments on autopilot- leaving you to focus on the things that really matter. And since the system is so flexible, you can tweak it to your specific circumstances and customize it for your personal finance goals.
It’s simple, guilt-free, and rewards you with peace of mind and a fatter bank account.
What other reasons would you need?