Category Archives: Money Management

How to break the cycle of paycheck-to-paycheck living

This post was originally published on June 8, 2010.

Paycheck-to-paycheck living has become all too common, especially in this economic climate. Unfortunately, it’s a vicious cycle, and when you’re in the middle of it, it can feel impossible to break out of it. It seems that every time you start to get ahead, there’s a car problem or a medical emergency or some other sudden expense that lands you right back where you started. I know from personal experience.

Nothing reminds you of how unsustainable paycheck-to-paycheck living is like losing your income. My husband and I supplemented a low income with our savings account for 8 months in 2010, and I can’t help but think about how different our situation would be if we hadn’t broken free of the paycheck-to-paycheck cycle.

The good news is, it’s not impossible to break the cycle. It takes time and patience and perseverance, but you can dig yourself out of the rut of paycheck-to-paycheck living. Here’s how:

Stop blaming your income.

One of the biggest complaints of people living paycheck-to-paycheck is that they simply don’t make enough money. It’s easy to tell yourself that your income is the problem, and that making more money is the answer. The problem with that line of thinking is that lifestyle inflation usually goes hand-in-hand with income increases when you’re living paycheck-to-paycheck. The sad truth is that it doesn’t matter what you make; you will find a way to spend it all. So stop blaming your income, and start thinking of ways to fix your situation now.

I know there are people who legitimately struggle with low income. If you’re in that situation, and you’re taking advantage of all of the government programs available to help you get back on your feet and still struggling, the only advice I can give you is do what you can to survive for now. It won’t last forever. But someday when you’re earning more, remember this time. It will motivate you to save a cushion that will protect you from going through this again.

Spend less than you make.

If you’re stuck in a paycheck-to-paycheck rut, the only way to start digging your way out is to start spending less than you make. The very first step is to build a budget and cut any and all unnecessary expenses. If you’re ever going to get ahead, you need to free up some money in your budget to give yourself a cushion. Take a serious look at your spending habits. If you’re struggling to make ends meet, it’s likely that you’re overspending.

If you’ve taken a serious look at your finances, and you continue to struggle despite the fact that you’re not eating out or making unnecessary purchases, it’s possible you fall into an income category that could qualify you for government assistance. Consider taking advantage of those programs to help you dig your way out of your rut.

Save for emergencies.

If you’re living paycheck-to-paycheck, this scenario is probably familiar: every month, you try to put money in the bank, and every month something comes up that forces you to clear out your savings account. Before you can truly break the cycle, you need to be prepared for emergencies. Once you’ve cut your spending, start putting every extra cent into savings. Don’t be discouraged if you hit a few setbacks. Just keep saving. Eventually, you’ll build a cushion of $1,000-$2,000 for financial emergencies.

Pay this month’s bills with last month’s paycheck.

The ultimate goal is to get ahead of your expenses. Once you’ve saved for emergencies, it’s time to build a cushion on your checking account. If you’ve built a budget, then you should know approximately how much you spend each month. Instead of spending extra money, put it aside to put yourself ahead. Once you’ve saved an entire month’s worth of expenses, you’ll no longer be waiting until payday to send a check or restock the refrigerator.

Be disciplined.

When you’ve got several thousand dollars in the bank, it can be hard not to feel so confident in your finances that you go right back to your overspending ways. Remember, though, your savings doesn’t change your income. What I mean is, if your paychecks equal $3,000 a month, and you have $5,000 in the bank, it may feel like you can spend $3,500 a month. But remember, your savings won’t last forever, and you’ll end up right back where you started in four months. Budget according to your monthly income. If an emergency forces you to tap your emergency savings, be diligent about replenishing what you spent. Otherwise, you’ll end up living paycheck-to-paycheck again.

Simplify your money

At the start of the year, my friend Kacie inspired me to explore new options for simplifying our finances and bill pay process. I’m still working out some of the details for these new systems, but I’m going to share them with you here, in addition to the systems we already have in place for simplifying. Be sure to share your ideas in the comments!

Go paperless.

If you haven’t done it already, chances are you think about it every time you open a paper statement and see the words, “Go paperless now!” My advice is to just get it done. To keep a record of statements, open the electronic version when it becomes available and save it as a PDF on your computer. You’ll feel better without all that paper mail bogging you down, and it will simplify your filing system, too.

Automate your budget.

Rather than manually tracking expenses in a spreadsheet or on paper, sign up for a service like Mint.com. Mint will automatically track and categorize your spending. With very little management, you can see a complete picture of your spending and budget categories as well as charts showing you whether you’re on track for meeting your monthly budget limits.

Automate your bills.

Kacie has been working on this herself, and it inspired me to figure out a system that works for us. Right now, I navigate to each bill’s website and pay each bill online individually. I like the immediacy of paying online through the site, because I receive a confirmation immediately, and then it’s done.

I don’t like automatic electronic funds transfer, because it basically gives the payee unlimited access to your account forever. (I learned this the hard way when our previous health insurance company continued debiting our account for 4 months after we canceled the policy despite the fact that I elected to stop automatic debit months before we canceled. I eventually had to file a fraud claim with my bank and have them blocked from my account, at which point they sent us a letter notifying us that they were canceling the policy due to nonpayment. PFFT. FINALLY.)

Check with your bank to see how their automatic bill pay system works. Setting up each individual payee will be a pain the first time, but then it’s done and you can pay each bill through your bank’s website with a single click.

Split your paycheck to even out pay periods.

My husband is paid twice a month — on the 15th and on the last business day of the month. I try to balance our bills so that we’re paying about the same amount in fixed bills from each check, but our mortgage payment really throws that off. If we were extremely disciplined, this wouldn’t be an issue. We could just leave the surplus from the other check alone, and use it in the next pay period. Unfortunately, that’s not usually what happens. What happens is we see that surplus in the first check, and we overspend for the first two weeks of the month. Then at the end of the month after the bills clear, things are really tight until the next pay day. It’s annoying.

Kacie came up with an idea that will remedy this problem, and I’m going to give it a try myself. She decided to add up all of her fixed bills (mortgage, utilities, etc.), and have half that amount deposited from each paycheck into a separate “bill pay” checking account. The remainder of each check will be deposited into a different account for daily expenses like gas, groceries, and other purchases.

For example, to make things simple, let’s say you earn $2000 a month. Your fixed expenses total $1500. Everything else is $500 a month. After paying your fixed bills, you have $400 left out of the first check and only $100 left out of the second check. Under Kacie’s system, you would deposit $750 from each check into the bill pay account and $250 into the daily expenses account. Now you have an equal amount for daily expenses each month, and your fixed bills are covered no matter when you pay them.

It might sound complicated, but I like the simplicity of having the same amount for expenses in each pay period. The symmetry will make budgeting much easier.

Pay the bills on pay day.

To combat the confusion of tracking a million different due dates, pay bills just twice (or once) a month. Every pay day, I go through and pay all the bills that are going to be due in the next two weeks. I have a list that I work from, so I know around what time the bills will be due even if the actual date fluctuates by a day or two. Once I pay all the fixed bills, I know that whatever is left in the account is available for day-to-day expenses.

How do you keep your finances simple?

Photo credit

Are you managing your money, or is it managing you?

budgetingWhile visiting my best friend last weekend, we had an interesting discussion about budgeting. She and her husband are in the same place Tony and I were when we decided to start living frugally. They’re looking for ways to cut back after moving to a new city and taking a pay cut. Like a lot of 20-somethings, they have a lot of aspirations for their money, and they’re looking to make their dreams come true faster by saving more and spending less. They’re definitely on the right track.

During the conversation, we came to a conclusion that I think explains proper budgeting more simply than any way I’ve tried before: The problem is that many people choose the lifestyle they want, and they try to earn enough or stretch their money so they can live that lifestyle. Proper budgeting is the other way around. You need to look at how much money you have, and determine the lifestyle you can live with it.

This is the number one mistake I see new budgeters making. If you’re trying to make your income match the lifestyle you want, you’re setting yourself up for a life of debt, paycheck-to-paycheck living, and constantly feeling behind financially. Proper budgeting is about finding the best balance for spending the money you have.

Controlling my budget this way also makes it easier to increase savings. Extra money shows up as a surplus in our budget. I’m already used to getting by on less, so I’m more likely to throw extra money into savings. If I was constantly working on a deficit, that money would just be eaten up by daily spending.

I’m not against working harder to increase your income if you can do that. But don’t budget for that lifestyle until the money is in the bank.

Zero-based budgeting is the easiest way I’ve found to do this. If you’re setting up your first budget, don’t look at expenses first; look at income. Zero-based budgeting forces you to divvy up your income based on exactly what you earn. It allows for greater flexibility in your income. Some months you may earn more. Some months you have extra expenses. Creating a budget every month based on the money you have allows you to stay in control.

Remember, budgeting is about controlling your money. If you feel like you’re not in control of your money, it’s time to reevaluate your budget.

This article from my partners at Debt Advisory Centre * provides a little more budgeting advice.

Photo by think panama

*This post includes a link from one of my partners.

Why I’d rather spend less than earn more

This post was originally published on May 13, 2009. Now that I’m a stay-at-home mom, this post is truer than ever for me. I needed a reminder of why my priority will always be finding ways to cut our spending instead of increasing our income. I thought I’d share it with you, too.

When you’re working to save money or get out of debt, there are two main ways to do it: spend less and earn more. When you’re struggling to make ends meet, the solution is to cut your spending or find a way to increase your income or some balance of both.

I’ve always favored the spend less approach on my blog and in my life. I’m not a big fan of Dave Ramsey’s advice to go to extreme measures to increase your income. I’d rather work hard to cut spending than pick up a second job or extra hours to increase our income. Here’s why:

My time is worth more than money.

If we took on night jobs or weekend jobs, we could speed up our debt repayment and savings. But at what cost? We’d lose our only real quality time together, our only time to relax and recharge. As I said yesterday, frugality is about improving my quality of life. Working nonstop isn’t what I think about when I think about my best life.

Being short on time can cost money.

When you’re constantly rushing around, you’re more likely to cling to convenience. From picking up take out at the end of a night shift to paying more in childcare to cover your long hours to skipping money-saving habits like menu planning and coupon clipping because you don’t have time, rushing around can get expensive.

Higher income leads to more spending.

Obviously, the point of frugality is to avoid increasing expenses as income increases. But the harder you’re working to bring in that extra income, the harder it can be to tell yourself, “No.”

Even if you can avoid spending money on unnecessary things, there are some natural upgrades that come along with a better income: home ownership, vacations, little luxuries. If you put more of your focus on earning than saving, it’s likely that those little upgrades will add up to a lot of extra spending. By focusing on saving instead of earning, we’re living comfortably without being tempted to splurge to much. As our income naturally increases and we continue to spend less than we make, we’ll find a way to fit these upgrades into our budget.

What about you? Would you rather spend less or earn more?

Adjusting to our new lifestyle

This summer has been terrible for our finances. We haven’t had any income since May. Thankfully, our bills were drastically reduced for the first, oh, 6 weeks of summer while we stayed with Tony’s family. But we still had car insurance, health insurance, student loan payments, my health insurance deductible, and other expenses.

We moved into our own place in the middle of July, and ever since then we’ve been hemorrhaging money from our savings account. I try to remind myself that this is why we saved. We knew moving was going to be hard, and that Tony wouldn’t start work until August. And of course, when you start a new job, it’s always a few weeks before you receive your first paycheck.

Tony is scheduled to be paid for the first time today, and this month marks the first when we’ll be utilizing our new budget. Up until now, the name of the game has been Spend as Little as Humanly Possible, but I didn’t create a zero-based budget because we didn’t have a monthly income.

When Tony was first offered his adjunct teaching position, his salary wasn’t going to be enough to cover even our bare bones expenses. But they offered him additional classes (he’s now teaching 6), and the extra income took us barely over the edge. Thankfully, they’ve already offered him 6 classes for the spring semester, too, so we know we’ll be set until May. I’ve spent a lot of time crunching numbers, and it looks like we should be able to hang on to our savings if we can keep our budget very tight.

Unfortunately, there’s no room in our regular budget for savings. However, our regular budget is based only on my husband’s income. Any income I make through freelance work or blogging will be reserved for savings. So we’re hoping to replenish the $2,000 we spent from our emergency fund over the summer.

Our new monthly income is about 1/3 lower than our previous combined income. Our monthly savings budget took the biggest hit since we’re no longer including it in our regular budget (for now). But there are other shifting expenses. Our rent is much lower here, but we’re now paying about $500 a month for health insurance (and that will go up when the baby comes. Ugh.) We’re also spending money here and there buying things for the baby (diapers, clothing, etc.)

With new expenses and lower income, we’re trying to make major changes to our spending habits. Here are the biggest changes:

Groceries/Household Goods

I’ve jumped onto the drugstore game, and I’m doing pretty well. Unfortunately, my pregnancy has wreaked havoc on our food bill. When I go to the grocery store, I end up with tons of extra food in the cart. When I send my husband alone, our bill is lower, but I spend the week feeling like I’m starving and there’s not enough food. Sometimes I even send him out to pick things up. Harumph. I’m not sure how to get around it. I was never a big snacker before I got pregnant, but now it seems I need several snacks a day. And snacks are expensive. Hopefully my drugstore deals are offsetting our overspending on groceries. I’ll have to wait until the end of a full budget cycle to know for sure.

Entertainment

We’ve cut cable and most entertainment spending from our bill for now. I haven’t missed going out much since most days I don’t feel well enough to do anything but lay on the couch anyway. Now that we’re living in a smaller town, we’re also not tempted by recreational shopping trips that result in $50 worth of stuff from Target that we don’t need, and that definitely helps.

Utilities

This apartment is much more energy efficient than our last place. So we’re saving money on our electric bill without even trying. Yay! We tend to keep our place cooler by default, so I’m anticipating lower energy use in the cooler months — at least until December when the baby arrives.

Our goal is to make it through the year with our emergency fund intact. The really ambitious goal is to replenish what we’ve spent and save a little more on top of that. We’re still working on cutting our spending to free up more money for savings. I’ll let you know how it goes!

Photo by purpleslog

Challenge yourself with a No Spend Month

For the past couple of years one of my favorite bloggers, Rachel at Small Notebook, has challenged herself to a month of very limited spending and written about her results. Last year, I was inspired to try a challenge of my own — a summer of cash budgeting.

It may seem like a month or two of limited spending won’t make much of a dent in your overall budget, but we were amazing at how much we could actually save in just 30 days without extra spending. More importantly, though, the psychological effects of just 30 days of limited spending can last for months or longer. Teaching yourself how little you really need to be happy can permanently alter your attitude about spending. As Rachel wrote today:

I thought once the month was over we would be desperate to go out for coffee or to go out to eat, but it wasn’t the way you would think. An entire month is long enough to change your perspective about spending money and what you get from it.  You can change your habits. You suddenly realize the value of a dollar when you have to stretch every single one and make it count.

Our experience was similar. Instead of running out and spending money at the end of last summer, we were much more careful about money as we headed into the fall months. We’d learned just how little we really need to be happy, and we learned how much more valuable it is to keep money in the bank. We also learned that challenging ourselves to spend as little as possible didn’t have to be an exercise in deprivation — it could be kind of a fun game.

Rachel at Small Notebook has decided to skip the challenge this month, but I urge you to head over to her blog and read about her past experiences with No Spend Month. Hopefully you’ll find the same inspiration I did to make some positive changes to your spending habits this summer.

Why I’m a money multitasker

Last week’s post about holding off on paying down debt sparked a little controversy in the comments. I wanted to clarify some of my views, because there seems to be some confusion about my financial philosophy.

First of all, I am not debt free. I have never claimed to be. Like most 25-year-olds, my husband and I both carry student loan debt. I’ve written about it before. I don’t regret a day of my education, but I do regret some of my financial choices during that time. But it’s done now.

My husband is a graduate student. I earn an entry level salary. We’ve been blessed with a few pay increases over the past few years, but our income remains pretty low by today’s standards.

When I started this blog, I was depressed about our financial situation. We had credit card debt, student loan debt, no savings, tuition to pay, and we still felt like we didn’t have any money left over for fun. I wanted to learn to save without sacrificing fun.

Since then we’ve adapted to spending very little money in our daily lives. We don’t eat out. We shop the clearance racks (when we do shop). We meal plan. We share a single vehicle. The result is that 30% of our income goes directly into savings. Another 10% of our income goes toward debt repayment.

As my husband prepares to graduate next month, and we prepare to close this chapter in our lives, we have been spending more than usual lately. After three years of frugal living and hard work to pay off credit card debt, build an emergency fund, save for our move, and save for our vacation, we are rewarding ourselves.

I did not ask for permission. I don’t think any of you should ask for permission from anyone when you make decisions about how to manage your money. The point of my blog — from the beginning — was for my husband and I to learn to live on less than our already low income so that we could have enough money to pay debt, save, and enjoy life. Those are my priorities.

I have never subscribed to the Dave Ramsey philosophy. I understand that it’s worked for many people. I admire them, and would never ever judge their choices. I’m happy for them, because they’re happy. But putting every single penny of my extra income toward debt repayment doesn’t make me happy. I don’t want to wait until I’m debt-free to have children, own a home, or see Europe. So I’m using some of my extra income to save for these goals while I pay down our debt.

I admire the commitment to debt-free living, I do, but there is room in my budget for more than that. Dave Ramsey’s baby steps philosophy is focused on one thing at a time — save, then pay debt, then save some more. Only after you’ve saved and paid debt is there room for fun. I just don’t believe that.

I come from the generation of multitaskers, and I think if you’re smart about your spending, you can do a lot even with a very limited salary — without increasing your debt. You can save money, have fun, and pay down debt at the same time. It will take a little longer, but it’s worth it to me. I will eventually be debt free. That low-interest debt will be there waiting for me when we get back from Europe. And we will pay it off — on our own terms and our own timeline.

What Dave Ramsey takes for granted is that we have all the time in the world. But what happens if you spend your young life doing nothing but saving and paying down debt, and then your life is cut short by tragedy? You’re left with no time to enjoy the riches you’ve accumulated. I’d rather multitask now and know that I won’t run out of time before I can enjoy the fruits of all that saving and hard work.

When we get home, it’s back to counting every penny, just like we have for the past three years. It’s back to saving for our goals through very limited spending. We can’t forget about why we’re doing this, though. We want to build a better life for ourselves, and sometimes that means spending a little money.

The whole point of budgeting is making your money go further. If there’s something you’ve been wanting to save for, don’t wait for permission. Start saving now. I think you’d be surprised at just how far your money goes if you spend carefully.

Photo by amagill

Why we chose to let debt-free living wait

Update: I just wanted to clarify something. We are currently repaying our student loan debt slowly but surely. Our loans are not in forbearance. We just aren’t focusing our efforts solely on debt repayment. We’re splitting our extra income between debt repayment and savings.

In January 2009, we paid off our credit card debt. Compared to some of the debt horror stories you hear, our amount was relatively low — it was about $4,000 left over from college overspending and car repairs. We paid it off in just over a year while Tony was a graduate student and I was working in retail. Money was very tight at the time, so we’ve always been proud that we were not only able to avoid increasing out debt at that time, but we were able to pay it off.

We’re not debt-free, though. Not even close. Between the two of us, we still have a huge chunk of student loan debt — to the tune of $50,000.

For the past year or so, we’ve continued to pay minimum payments on my loans. We haven’t even begun paying Tony’s debt back because his loans are deferred until he graduates.

So here’s my confession: for right now, paying off our student loan debt is not our #1 priority. And it probably won’t be for another 5 years.

When we were working to pay off our credit card debt, we weren’t using every penny of our extra income for debt-repayment. We knew we had a move coming up in a year, and we wanted to build an emergency fund because we wanted to start a family. We made the decision to split our income between savings and debt repayment.

Right after we finished paying off our credit card debt, our plan was to use that money to pay off our student loans. But when you’re living on a small income, there just isn’t a lot of money to go around. We realized that in order to reach our savings goals, we’d need to divert a lot more money into savings.

Then we started talking about Europe. Believe me, I know that in the frugal community, saving for a vacation like that with as much debt as we have is a no-no. But you know what? We didn’t want to wait until we were debt-free to live our lives. Sure, we could put every penny toward debt and really work to pay down those student loans right now. Even then, we’d be well into our 30s before they were paid off. By then we’ll have children, maybe even a house, and a lot more financial responsibility. We’ll hopefully have more income, too.

Does debt-repayment mean putting everything else on hold when you’re young? In my opinion, no. For some people, the rush they get from sending another huge payment to pay off debt is enough to keep them motivated. Not me. If we were using every penny to pay off debt right now, it would be so depressing for me.

Unless we magically double our income overnight, it’s going to take us years to pay off this debt. For years and years, our only focus would be debt repayment. I’m not going to wait to do and see the things I want to see. I’m not going to wait to start a family or save for a house. That debt is going to be there for a long time. I can’t wait that long to live my life.

That doesn’t mean we don’t have a plan, though. There are just a couple things that are going to come first. When we get settled in Indiana, we’ll be in survival mode until Tony gets settled in a job. Then we’ll replenish our emergency fund. Then we’ll start saving for a house. Once we’re moved into a house, it will finally be time for us to put all of our extra money toward those debts.

This method isn’t for everyone. I’m sure many of you think it’s crazy for us to leave that debt alone for the next 5 years or so, accruing interest. When it’s time to pay it off, though, I plan to do it in about 5 years. Our plan is to buy a very modest starter home, which will help us put more money toward debt. It will be tough, but at least I’ll know that I’m not missing out on experiences in order to do it.

Photo by sgw

Two bank accounts = too much confusion

When I first switched to my ING checking account, I absolutely loved it. I still love my checking account with them. But we are finally experiencing some of the confusion I feared when we made the switch.

Because ING Direct is an electronic bank, our account must be linked to a brick and mortar bank. This allows us to cash and write paper checks. Aside from the occasional birthday check from my grandma, we rarely cash paper checks. Unfortunately, though, because of the timing of my husband’s paycheck and the way that ING’s paper check mailing process works, we still use our brick and mortar bank to write our rent check.

It’s been relatively easy for the past several months. Tony’s monthly paycheck is split up — the rent money is automatically deposited into our brick and mortar bank on the last day of the month, and the rest of his paycheck goes into our ING account. We write the rent check, give it to the landlord, and everything is fine.

This month I made a mistake, though. A few of our online bill pay accounts still have the account information from our brick and mortar bank. I must have selected that account accidentally when I paid a bill at the end of the month, because $100 of our rent money was deducted from the bank before the rent check cleared.

When I logged in to see if the rent check had cleared on the 2nd, I realized there wasn’t enough money to cover the rent. If the check cleared without enough money, we’d have to pay a $25 returned check fee.

It takes two business days to transfer money from ING to the brick and mortar bank, so there wasn’t enough time to transfer money in order to avoid a bounced check.

Luckily, I caught the mistake in time to make a cash deposit at the brick and mortar bank. Because the check hadn’t cleared yet, I was able to deposit cash into the account and avoid a returned check fee. The check cleared at midnight on Feb. 2 without a problem.

I learned a few lessons from this headache. First of all, I removed our brick and mortar account information from all of our online bill pay accounts to avoid selecting it accidentally again. From now on, I’ll also be checking our brick and mortar account to make sure I haven’t made any mistakes before I turn in the rent check.

This is the second big mistake I’ve made in as many months. Last month, I actually forgot to pay a bill (a first for me), and we ended up paying a late fee. I don’t know what’s up with me lately, but the biggest lesson I learned from this? I need to get on the ball. I don’t know if it’s stress from all the planning and changes ahead or what, but my lack of focus could end up costing us if I’m not more careful.

Photo by potteryandeverythingelse