Nearly 4 out of 5 (80%) Americans live paycheck to paycheck despite a booming economy and record US stock market gains.
As much as I talk about investing, I realize many of you are struggling to make ends meet and don't have any money to invest.
Don't beat yourself up. Everyone makes mistakes.
I know exactly how you feel.
In March 2018, I was suffering from severe alcohol addiction with no retirement savings, no investments and less than $1,000 in savings.
All I could afford was a bed in a 8-bed dorm room for around $200 per month. I spent the rest of my money on alcohol, girls, and nightclubs.
Now, it's 2020 and I've made a lot of progress towards my financial goals (including the revival of this website).
Ever since I started to get more serious about my finances and grow this blog, I've managed to save over $10,000 in 1 year while living in a much nicer apartment on relatively similar income.
I'm also supporting my GF and 6 month old son as the sole breadwinner of the household.
You can stop living paycheck to paycheck even if you have a spouse and kids. No matter what your current financial situation is, all you need to do is make some smart, lasting changes to see huge results!
I could have saved a lot more money much faster if I knew about a simple to follow plan.
How did I achieve this?
Step 1 – Pay Yourself First
This is by far the most important step of all. In fact, if you just follow this one step then you are guaranteed success.
Paying yourself first means you direct a portion of your paycheck into a separate savings account or investment account and let the money grow.
How do you pay yourself first?
Open a new savings or investment account and have your employer deposit at least 10% of your paycheck into this new account.
If you are self-employed like me, then transfer 10%+ of your income into this account. Many banks or brokerage firms have automatic deposits so you can put this on autopilot.
This is the secret to stop living paycheck to paycheck. At first, you won't have much in these accounts but after a few months your balance will grow like a weed.
This is exactly how I saved over $10,000 in less than 1 year.
Pay Yourself First means you are guaranteed to grow your investments & emergency savings over time.
Here's what most people do: Pay their bills first then try to invest whats leftover.
Usually, there is nothing left!
Step 2 – Track Your Spending
Tracking spending can be an eye opening activity for most people. Almost everybody knows how much they earn. The question is: How much do you spend every month? Most people have no clue.
If you are tired of living paycheck to paycheck, then you need to know exactly where your money goes each month. I mean you need to track EVERY SINGLE DOLLAR.
I use Mint (it's free!) to track my monthly spending. Download the app to your smartphone and link all your credit cards, checking & savings account. If you don't have a smartphone, then sign up online and use the desktop website.
Every month, I group my transactions into categories to see where the majority of my spending occurs.
This gives you a clear birdseye view of what you need to cut your spending on. Here are some of the major changes I made to free up my finances:
- Quit Alcohol & smoking
- Cancelled my Cable TV & started working out from home or in nature
- Turned Vegetarian to save money on expensive meat based meals
- Avoided the costs of car ownership
- Used debit cards instead of credit cards to avoid paying interest
- Negotiated a lower rent with my landlord and downsized to a cheaper room
Step 3 – Track Your Net Worth
Do you remember how nervous you felt in high school when report cards were due? Your report card showed your parents how well you performed in school no matter what you told them otherwise.
When you graduate from high school, you obtain a different report card in adulthood: your net worth.
Net worth is the simple calculation of your assets minus liabilities. It's a simple metric to determine how well or poorly you are doing financially.
Tracking your net worth is another key strategy to stop living paycheck to paycheck. It's an honest view of what your finances look like.
Personal Capital is a 100% free tool to start tracking your net worth. Sign up and link all of your accounts and take a look at how you are doing.
I also recommend some net worth communities like NetworthShare to track your networth publicily. You don't have to share your real name or anything. Create a username and start entering your assets and liabilities every month.
Your goal should be to have LOTS of ASSETS and very few liabilities.
In a perfect world, you should have zero liabilities which means your long term goal should be zero student loan debt, zero credit debt and a paid off mortgage.
Owning nothing means you don't have to spend your paycheck servicing debt on purchases made in the past. This frees up cashflow and increases your savings/investments much faster.
Step 4 – Build an Emergency Fund
Your emergency fund is the first line of defense in case of a setback like illness, job loss or unexpected emergency.
My recommendation is to build your emergency fund in a separate account from your regular checking & savings.
Because you won't be able to easily spend the money. Making it difficult to access gives the cash time to build up and provide a nice financial cushion for yourself.
I recommend a high yield savings account like AllyInvest for your emergency savings if you don't like risk.
For risk takers, I recommend Stash Invest as a great way to increase your emergency savings faster by investing in fractional shares of stocks/ETFs. Most of my emergency savings is invested in companies like Apple, Google, Microsoft, and Mastercard.
Step 5 – Open a Brokerage Account
Stock ownership made them rich and it can do the same for you. You can own stocks no matter your race, age, color, sexual orentiation or religious background.
And why wouldn't you? All of us spend money everyday with companies who trade on the U.S. Stock Market.
Not convinced? Let me give you a break down of how often I personally spend with US traded companies. Here's a quick list:
- I'm typing this article on a HP 13 inch Laptop (NYSE: HP)
- My laptop mouse is made by Logitech (NASDAQ: LOGI)
- My laptop software is made by Microsoft (NASDAQ: MSFT)
- I drank a cup of Lipton Tea (OTC: NSTL)
- I spoke with my Dad via Skype (NASDAQ: MSFT)
- I'm searching Google for other references to improve this article (NASDAQ: GOOG)
- I invoiced a client earlier today using Paypal (NASDAQ: PYPL)
- I ordered some food online using my Visa debit card (NYSE: V)
I could go on and own but you get the point.
Write down all of your spending & consumption for a day and see how many of the companies you support are publicily traded.
Take this list as a starting point for your investment portfolio. Since you use these products/services daily, you know more about the companies itself than if you chose some random stock.
Warren Buffett recommends you invest in companies you understand. Using the product/service before investing is a wonderful way to build a solid investment portfolio.
It's about time you owned a part of America.
If you're not American, then do the same exercise above in your local country. Invest in stuff you already use.
This turns you from a consumer into a producer because you become a part owner in a real business as a shareholder.
I'm proud to own shares in companies like Visa, Uber, Paypal, and Roku.
Step 6 – Negiotiate Your Bills Lower
I touched on this briefly in step 2 but it deserves its very own section in your goal to stop living paycheck to paycheck.
Most people overpay for things like insurance, rent, food, monthly subscriptions, etc.
The truth is you can often negotiate your bills lower with a few phone calls or emails.
Rent/Mortgage is usually your biggest expense so start with that. Here's a few tips:
- For Renters: Talk to your landlord and ask for a lower rent if you lock into a longer term lease. Offer to pay with cash to lower your rate even further. Cash in hand is worth more than a check, Paypal, or bank transfer.
- For Homeowners: Refinance your mortgage to a lower rate to save money every month.
Do the same with your insurance companies and ask for a lower rate. Most will agree to a lower rate rather than lose a loyal customer.
Downsize your monthly subscriptions to a cheaper plan. If you really need it, then purchase a longer term plan to save money. Many subscriptions offer annual plans at a 30% or more discount.
Get in touch with these companies and see how you can reduce your bills. You'd be surprised how much you can save in a few days with these tiny tweaks.
Step 7 – Add Extra Income Streams
Studies show millionaires have 7 different streams of income.
Most people who live paycheck to paycheck earn 1 source of income through their job.
Adding a 2nd (or more) stream of income does wonders for your finances and helps you save money even faster. Best of all, this income can go straight towards your long term goals of paying off your home, building a college fund for your kids, or early retirement.
Now, most people say they don't have time to build a 2nd income but I think that's crazy.
If you don't have enough time, start tracking your daily activities and you'll be surpised at how much time you waste.
Write down on a piece of paper everything you do hourly for one day.
Then sit back and figure out if you can replace timewasting activities with more productive ones.
These 3 activies wasted A LOT of time so I stopped going out at night and only watch Netflix for 2 hours max. I deleted most of my social networking apps on my phone and only use Youtube sparingly.
With all this extra time, I was able to write more for this site and track my investments more closely.
For most people: Social Media is a massive waste of time.
Replace social media time with side hustle time and you can stop living paycheck to paycheck.
Here's a few cool side hustles to earn extra money right now:
- Start a money making blog (like this one you're reading
- Ask your friends what you are really good at then charge money for it
- Sell stuff on Amazon or eBay
- Sell your freelance services on Fiverr or Upwork
- Become a housesitter
- Make money as a dogwalker
- Drive for Uber or Lyft (if you have a car)
There are so many different ways to build a 2nd income stream. Use the 2nd income wisely. Save as much of the money as possible until you have at least 6 months of living expenses saved up.
Step 8 – Change Who You Spend Time With
This step was a very tough one for me because I had to cut many people out of my life.
There's a famous quote by Jim Rohn stating: You are the average of the 5 people you hang around.
It's really true when you think about it.
You pick up the habits of people you hang around. If you hang around 4 smokers, then you become the 5th.
If you hang around 4 broke people then your finances usually become a disaster.
Conversely, if you hang around 4 millionaires then you are more likely to become a millionaire.
That's the power of association.
Be honest with yourself.
Who is in your life is holding you back?
When I stopped hanging out with friends who struggled with money, my finances changed for the better.
If you're living paycheck to paycheck then take a look at your close circle of friends. Are they struggling with money too?
If the answer is yes then I think it's time to find new friends or spend more time with family instead.
I don't like the idea of hanging out with people based on the bank accounts. But I hate the idea of living paycheck to paycheck even more.
I let go of friends who sucked with money. I got tired of hearing their complaints and money problems.
It never stopped. They never took the time to realize that they needed to change their spending habits. It was always someone else's fault.
All the blame rested on someone else except them.
So I cut them off and pursued financial freedom instead.
Nowadays, I keep a close circle of friends and spend most of my time with family and my infant son.
Ending friendships hurts but living paycheck to paycheck hurts even more.
Step 9 – Create a Spending Plan (Budget)
Most financial bloggers use the word budget but the word carries a negative spin.
Budget sounds like you are missing out on things you enjoy just to save money. That's not cool.
You work too hard to miss out on fun stuff. Besides, tomorrow is not guaranteed. Enjoy the moment now because life is short.
I prefer the word: Spending Plan.
A spending plan is like a budget. It describes how you plan to spend your money every month.
Before my son was born, I was using the Shaq Budget of saving 50 to 75% of my income.
My expenses increased a lot once he was born so I moved to the 70/30 plan.
70% of my income goes towards living expenses.
30% of my income goes towards savings, investments and my son's UTA account.
For example, if you earn $3,000 a month then $2,1000 goes to expenses and you save $900 a month.
$900 per month adds up quickly.
That's $10,800 in savings per year.
If you don't have kids and are single, shoot for at least 50/50.
Heck, go for 90/10 where you save 90% of your income if possible.
Step 10 – Think Long Term
The last step is an important mental tip for everybody.
My biggest mistake financially was failing to think long term.
Time flies by and this summer marks my 15 year HS anniversary.
If I had thought long term, I would be much better off financially.
For my younger readers under age 25, start planning for your future today. Don't wait!
Time passes by and I've lost some close family members and friends along the way. I'm very thankful to be alive and financially stable enough to provide for my young son.
You will need money in the future. Don't kid yourself! We always spend money on food, transporation, kids, housing and other stuff. These expenses never disappear.
So follow the steps above and stop living paycheck to paycheck so you can build up a savings after putting in years of hard work and sweat for the man!
For my readers over age 25, think in 10 years in advance
Many of you guys over 25 have spouses, kids, mortgages, and all the responsibilities of a working adult.
Start planning your financial actions with a 10 year mindset. That's the mental shift you need to escape the living paycheck to paycheck financial hell.
Visualize your life in 2030 then build the foundation right now. Every financial decision you make should move you towards your goals.
Need inspiration? Here's a picture of my life in 2030:
- Healthy, active lifestyle as a 43-year old
- Early retirement from work by age 40
- Paid off house in the countryside with my own organic farm
- Multi-millionaire in assets due to sound investments in stocks, real estate, gold & silver
- Spending time with my family and watching my son move towards puberty
I have many more mini-dreams but those are my 5 biggest ones.
What are your long term goals?
Write them down in the comments and share your thoughts below.
You Can Do This. Start Taking Action Today!
It's time to leave the 80% masses who are living paycheck to paycheck and join the 20% who are building wealth for the future.
You can do this no matter what age. It's never too late to change for the better.
Start at Step 1 and get started today. Try these tips for 1 month and let me know how it's working for you.
I tried to make this article as simple as possible no matter your education or financial background.
I'm not selling you an expensive personal finance course because I coudln't afford it when I was living paycheck to paycheck.
in 2018, I stayed up all night worrying about the bills while suffering in a dead-end relationship with an abusive, alcoholic girlfriend.
Less than 2 years later, I'm alcohol and drug free with tens of thousands of dollars saved up.
I spend time with my newborn son instead of strangers at a dirty bar.
I'm looking forward to the future.
I've changed so much in a short time and you can too!
Share your personal story in the comments section below. Why are you living paycheck to paycheck? What did you do to change your situation?
Tarik Pierce is the founder of InvestorTrip.com and regularly contributes articles to this website.
While living overseas, he uses PureVPN for a low cost VPN service.
He recommends Bluehost for setting up your own personal and/or business blog.
While his background is mostly related to trading stocks, he recently gained interest in real estate crowdfunding with Fundrise.