How I Escaped from Living Paycheck-to-Paycheck

Many of you wrote last week to say that I was too harsh on my friend Gillian, the woman with the “I can't” attitude. Perhaps you're right — I may have given up too early. I used to live like she does, and if I can turn it around, anyone can.

For a decade I was a deficit spender. I spent more than I earned. I used credit cards to fund a lifestyle that was beyond my means. Eventually I wised up — I destroyed my credit cards and cancelled my accounts, but my worries weren't over yet. I wasn't digging any deeper, but I was still stuck at the bottom of a hole: I was living paycheck-to-paycheck.

Twice a month I would deposit my paycheck, pay my bills, and then look to see how much was left. Whether the surplus was $20 or $200, I made plans for it: comic books, video games, clothes, whatever. I used to joke that I was an expert at spending every penny I had. Except that it was no joke. Late at night, when I couldn't sleep, I would wonder why I could never get ahead.

I lived like this for years. You can maintain a paycheck-to-paycheck lifestyle for a long time if you're not taking on new debt (and if disaster doesn't strike). Here's another way to look at it:

  • If you spend more than you earn, you are acquiring debt.
  • If you spend about what you earn, you are living paycheck-to-paycheck.
  • If you spend less than you earn, you are acquiring wealth.

I don't know about you, but my goal is the latter. Escaping the paycheck-to-paycheck lifestyle means building positive cash flow, getting ahead of your expenses. Instead of spending exactly what you earn, you need to save something every month; even $25 or $50 can make a difference. Once you start, this amount has a tendency to snowball. For me, a $25 surplus grew into a $100 surplus, which grew into $300 per month and more!

But how do you start generating this surplus? How do you escape from the paycheck-to-paycheck pit? Here are some ideas that worked for me — one or more of them may work for Gillian. Or for you.

  • Start a savings account. For years I resisted the idea of opening a savings account. “Why should I?” I said. “I don't have money to save. I barely have anything in my checking account!” But when I finally did open a savings account three years ago, a funny thing happened. I started finding money to stash there. It wasn't much at first — $20 here, $75 there — but in time, it made a difference. Before long I had developed the savings habit.
  • Pay yourself first. The best way to begin your escape is to save first, before you do anything else with your paycheck. I know this can be difficult. You worry that you won't have enough for your bills, for gas, for food. But the danger is that if you don't set the money aside first, you'll just spend it. Have a small amount — $25? $50? — automatically deducted from your paycheck and placed into savings. Chances are you won't even miss the money.
  • Spend with purpose. You may want to consider a budget. Budgets aren't scary, and they're not difficult. Some people find them liberating. There are a variety of computer budgeting tools available, including:

    A budget can be handy, but even if you can't bring yourself to use one, you should know where your money needs to go.

  • Draft a spending plan. I don't keep a budget, but I do create a financial plan every few months. It's nothing more than a quick financial snapshot showing my income and expenses. I also list upcoming major outlays. This helps me keep my financial goals in mind as I go about my daily life. It's easier for me to decide not to buy the latest Spider-Man comic when I remember that I'm saving for a trip to Europe.
  • Attack your debt. These methods are great, but if you really want to free up cash, pay off a debt. I recommend using a debt snowball to tackle your obligations one after the other. But if your goal is to ease financial pressure ASAP, you may want to try a slightly different approach. Pay off your debt with the smallest balance, but instead of rolling the freed cash flow into the next debt, use it to establish a savings buffer.
  • Cut costs. This one's obvious, but can be difficult. My friend Gillian views cutting costs as deprivation. If you're willing to look behind the immediate sacrifices to the long-term gains, cutting costs is an excellent, quick way to free up cash. There are a million little things you can do to save money now.
  • Boost your income. Many people have suggestions for how to cut costs, but few remember there's a second side to the wealth equation. Earning extra money helps just as much as practicing frugality, and sometimes hurts less. But how do you get extra cash? Find a part-time job for a few months. Sell some of the stuff you've acquired over the years. Ask your boss for a raise. Find a way to make money from your hobbies.
  • Avoid lifestyle inflation. A final way to escape the paycheck-to-paycheck purgatory is to opt out of lifestyle inflation. When you get a raise, don't adjust your standard of living to match. Use part of this new money to pay off debt, and another part to accelerate your savings. When your friends show you their new iPhones, ooh and aah, but resist the urge to get one yourself. Learn to love what you already have.

When I became serious about my finances, I realized that living paycheck-to-paycheck was dangerous. I was always one disaster away from returning to the credit bandwagon. I made a resolution to stop living on the edge and to start saving. It was difficult at first. Old habits die hard. But with time and persistence — and with the habits above — I made the switch. Now, a couple years further on, I'm just beginning to profit from my hard work. I have a monthly cash surplus. I have escaped from the paycheck-to-paycheck lifestyle.

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Angie Hartford
Angie Hartford
13 years ago

” * If you spend more than you earn, you are acquiring debt.
* If you spend about what you earn, you are living paycheck-to-paycheck.
* If you spend less than you earn, you are acquiring wealth.”

I love that this is all we really need to know, yet so few of us have learned this simple lesson. Human nature is capricious, fascinating, and occasionally infuriating, yes?

Moneymonk
Moneymonk
13 years ago

Just having no debt and living check to check is not enough b/c you are barely getting by. Build wealth!
Just b/c you are out of debt it does not mean you are safe. Don’t stop there. Start a new chapter in your life and SAVE the extra money you have after the bills are paid.

I started doing the same thing. No regrets

Good post. GRS

Triston
Triston
13 years ago

Hello J.D. Very helpful indeed! Credit cards give people the means to live as they would like but its only an illusion. People forget that. Unfortunately, the credit card companies have seen tremendous growth and they hurt those who don’t even use cards for purchases. Take the interchange fee, for example. Merchants are forced to raise prices as these interchange fees increase. It is unfortunate we all have to pay these fees, whether or not we’re using cards or not. I’m working with Unfaircreditcardfees.com to get Visa and Mastercard to be more transparent.

I’m off to start saving!

MVP
MVP
13 years ago

You were NOT hard on her. Naturally, you were just frustrated that she was asking for advice, but wouldn’t take it. A REAL friend tries to help their friends by being TRUTHFUL, someone who tells their friend something they may not want to hear, but is the TRUTH.

MVP
MVP
13 years ago

What I meant to say was:
You were NOT too hard on her. Naturally, you were just frustrated that she was asking for advice, but wouldn’t take it. A REAL friend tries to help their friends by being TRUTHFUL, not just telling them what they want to hear.

Adam
Adam
13 years ago

I’m young 18 years old, just getting ready for college, and I spend all of my paycheck. What I consider “spending/paying” is paying myself 50% of my 430-500 a month pay check. I(usually less) spend $250, and save between $180-250 a month. I have over $2000 in savings thats gonna go bye bye next month (tuition + books).
I also have a small webdesign business that’s generating money, also sucking money way, that I try to stash away to invest when I can reach the $1000 minimum @ Vanguard.

I’m building wealth right now, no debt. 🙂

InvestEveryMonth.com
InvestEveryMonth.com
13 years ago

Paying yourself first is one of the most important investments lesons I ever learned. I now have automatic withdrawals set-up so my investments are made before I have the chance to spend the money on things I don’t really need.

Jeremy Bettis
Jeremy Bettis
13 years ago

I have a spreadsheet that I have been sharing with people. It is a little bit less complex than some of these other solutions. It also might not do as much for you.

http://www.deadbeef.com/index.php/bi_weekly_pay_period_blank_excel_budget_

Amber Yount
Amber Yount
13 years ago

I finally made a little bar chart to put on my fridge that I can color in every time i make a debt or savings payment 🙂

Business Twins
Business Twins
13 years ago

People in general need to see what they are spending their money on. In my opinion, most girls won’t and can’t tell the difference between a necessity and commodity. Some friends of mine (who are girls) buy things they don’t really need in life that won’t benefit them any greater than ‘status’ amongst other girls.

gameguy
gameguy
13 years ago

I have just recently started using Mvelopes as a budgeting tool. It seems like it could make using an envelope system much easier. Great advice on avoiding lifestyle inflation. I have a raise on the horizon and I was already thinking in terms of how to use the extra money.

JenK
JenK
13 years ago

Adam @ #6 – Good for you! Reminds me of Lawrence Block, in one of his books on writing – he said it was an advantage to become a writer when he was in college and used to not having much money, so what he got paid for short stories was about what he could earn part-time at a student job. If you don’t have it you don’t miss it.

Twins @ # 10 – Girls are children, are they not? Why would you expect them to make mature decisions? 😉

Sara
Sara
13 years ago

I agree with this, many girls (and guys) buy electronics that they don’t even use because they “look cute” or they “look hot” or they will give you social status when you go to a bar and whip them out in front of the guys. The whole Iphone debacle reaks with this premise. Too many people spend too much for electronics with more features than they will actually use, they make different models of stuff for a reason. You have to ask yourself, do you REALLY need that new cellphone, are you going to USE all the features of that… Read more »

JenK
JenK
13 years ago

JD –

One key thing for people who haven’t been paying attention to spending is to track all expenditures for a week. A month is better, a but a week will tell you a LOT about how the lunches, cups of coffee, video rentals, etc add up.

J.D.
J.D.
13 years ago

Good one, JenK. I meant to include that in the article, but somehow I forgot. I must be getting old! 🙂

DC Economist
DC Economist
13 years ago

I’ve been keeping a budget plan for years, but my impending nuptials made me really want to buckle down and track things accordingly. The first item on my agenda was for us to pay ourselves. We both increased our automatic contribution to our 401k/403b from 5% to 10%. My second item was track my cashflow so that I am saving enough for yearly expenses, like a vacation or my economist subscription or other optional yearly expenses. My third item was to ensure that my cashflow after these yearly expenses was positive, so that I could add savings to either my… Read more »

DC Economist
DC Economist
13 years ago

I also battled whether or not to put that 2nd rent payment in the next month, but since my budget tracks cashflow, I put it where it belonged…and took the negative hit.

Stephen George
Stephen George
13 years ago

I love these types of websites. But they miss one small problem. Money is based not on gold or silver but debt. If everyone is out of debt there is no money. After all without the poor there is no rich. That is why it is so hard to get out of debt and if everyone tried at the same time they would fail. Because there is quite litterally not enough money in the world to pay off all the debt. And the money system is designed this way to keep you hungry. Yes you can always improve your possition… Read more »

CptofMySoul
CptofMySoul
13 years ago

Hey JD! I was thinking about this the other day when you posted the discussion between you and your friend. I believe, and you might want to consider, that education goes before change. Next time you are in that situation, consider just suggesting some of the books that you have found so helpful. If the person truly is interested, they will follow up after gaining some knowledge. I think this would be much less frustrating than trying to get someone to change their habits on the spot.

Etiana
Etiana
13 years ago

The quote about spending more than you earn etc. will be typed up and put on my wall that I fill up with inspirational quotes – it says it all. No matter where you are at financially it applies.

I am a firm believer in paying yourself first but still struggle with doing that. How come I can pay the bills, pay my tithing, even put money away each month in my girls savings accounts but I don’t always pay myself first? I need to make that a priority – pronto.

a
a
13 years ago

Who needs an iphone, not me, no sir. I dont need a iphone…I keep repeating this, hope it helps…does anybody know if repeating that helps?

Paul Freeman
Paul Freeman
13 years ago

I think you were hard on Gillian, but I think that will help her in the long run. Until she has the “light bulb” moment, she won’t be able to take on board what you are saying, and taking the hard line will help her towards the light.

Nick
Nick
13 years ago

I have lived all my life from paycheck to paycheck, and what this article preaches is true. Living that way is not really living. I am slowly digging my way out of debt, but it’s tough! Never forget what you are working for.

Sam
Sam
13 years ago

I think everyone comes to their own financial realization at their own time or they are forced to face the music when something bad happens and they end up in financial crisis. In this day and age, living within one’s means or living below one’s means (saving) means that you are the oddball so, as a result, I think a lot of ‘normal’ people find folks like us weird. My husband and I have been working on our debt rapayment plan since 1/1/07 and I’ve had a number of conversations with my friends (who all make a very good living… Read more »

Rad
Rad
13 years ago

Great post JD, atual saving is the step most people find the hardest. It’s easy to say you don’t make enough to save anything, only because you feel $20/month isn’t worth the effort. Once you get started, that snowball gets easier and easier to push along. Once you start seeing some interest help build the account, you really get it going. Temptation is the next biggest hurdle. $1,000 looks prettey tempting when you want to go on vacation, and hey “it’s your money, you saved and you should get a prize”. This mentality is also difficult to break. Nice job… Read more »

Yuri
Yuri
13 years ago

Believe it or not, but after this article I’ve started my first saving account!

Angie
Angie
13 years ago

Great, Yuri! May it grow beyond your wildest dreams. 🙂

Minimum Wage
Minimum Wage
13 years ago

I have avoided lifestyle inflation, since my income has been declining in real terms, I have undertaken lifestyle deflation. Next step could be homelessness.

Cheryl
Cheryl
13 years ago

AWESOME POST! I started “paying myself first” about 9 months ago…sometimes it’s only $10, sometimes it’s as much as $200, depending on how the month goes…most importantly, there is always SOMETHING going into savings!

jos
jos
13 years ago

Great INFO! before i lost my job i had started to attack my debt (got 1 card paid off and closed and paid down the other 2 about 15%) and began to put 50$ from each check into savings… as soon as i get a job again im going to pick back up where i started and spend with a purpose… i eat out way to much… thanks for the info

Aleks
Aleks
13 years ago

“I think 95% of americans cannot tell the difference between a “need” and a “want” and as a result get stuck in the consumer debt cycle.” One of the points in The Wealthy Barber is that there’s no definite line between a need and a want. Everything is about choices. A car is theoretically not a need, but not having one would make grocery shopping a lot more difficult and might even limit where I can live. Practically everything in my life could be cut or replaced to save money. I could live in a tent and eat nothing but… Read more »

fedup
fedup
13 years ago

I will have a brighter financial outlook here in a few months, I had some old debt, that I probably could have avoided come back to bite me, dealing with it now, getting rid of it. Will be free of it all here in about September or October. Reading your threads inspire me. I am thinking if I can afford to pay chunks of $500 to get rid of debt now, that is what I am doing. Why can’t I be my own debt. $500 a month would add up quickly. That would be a fat $6000 in a years… Read more »

fedup
fedup
13 years ago

Your posts give me a very positive attitude and hope that there really is a brighter future ahead, at one time, I was so down about all this. Felt like a total loser.

wendy herdman
wendy herdman
13 years ago

When folks start screaming about how they don’t want to be “deprived” I usually pull out their budget and start looking for concrete ways to show them how they can get the same stuff in different ways. My own example includes going from spending $500 a year on books, to about $2 a year on library fines. A huge savings and I actually get a WIDER variety of books, not to mention cd’s, dvd’s, and even occasional video games.

Jesse Mecham
Jesse Mecham
13 years ago

Thanks for the YNAB plug JD!

And double-thanks for a solid article. Well said!

Minimum Wage
Minimum Wage
13 years ago

I make minimum wage and have student loan debt. I can’t think of any spending I can cut out without feeling deprived.

michael sparks
michael sparks
13 years ago

Sorry to say, but everyone is living paycheck to paycheck. It’s just that some checks are larger than others. Until you get away from a W-2 lifestyle you will never get away from the paycheck to paycheck type of living. Even if you have a 6 month emergency fund, it will quickly disappear if you don’t watch what you are doing. I guess the ultimate would be critical masss. This is what I’m working toward. Critiacl Mass is a state of freedom from worry and anxiety about money due to the accumulation of assets which make it possible to live… Read more »

ladykemma
ladykemma
13 years ago

i don’t think you were too hard on gillian. I am in a new situation where we are trying to live on my teacher’s salary while my husband makes a go at a new business. i said the housekeeper, cable, cell phones, and all “fluff” need to go. hubby balked and continues to balk. cell phone, can’t live without a cell phone! cable? no cable? we had a serious sit down talk and he came to understand that if he doesn’t work, he can’t have a cell phone. hubby is quickly looking for a part-time job to pay for the… Read more »

Stefanie
Stefanie
13 years ago

This was a great read. I’m a young woman (25 and counting!) looking to nip my horrific financial habits in the bud. This is a great starting point for me.

debt consolidation
debt consolidation
7 years ago

Begin a savings account even if you can only save a little bit at a time. As your nest egg grows, you can tap into it in between paychecks until your finances become more stable. A savings account is also beneficial for unexpected emergencies.

Josh Collar
Josh Collar
6 years ago

Six months ago: There I was; standing tall in a shirt and dress pants – in front of the ATM machine. I had one and a half weeks to go before payday and I was debating with myself on the actual amount of money I have left in my account. So I slid the card in, jabbed the numeric keypad with my 6-digit PIN and selected ‘Balance Enquiry’. Tactless and brutal as a lifeless machine can be, it displayed my account balance on its scratched and fogged screen – completely disregarding any feelings that I may have. The pixelated screen… Read more »

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