Nearly half of Americans find themselves living paycheck to paycheck in today's global environment.
In this article, I will share seven steps to obtain financial freedom and stop living paycheck to paycheck.
According to the Federal Reserve, nearly 40% of Americans cannot afford a $400 emergency expense out of pocket. It is important to understand that you are not alone in the journey to stop living paycheck to paycheck.
Here are my seven steps to stop living paycheck to paycheck:
1. Acknowledge the issue
If you have been through Alcoholics Anonymous, you are likely aware that the first step in the process is to acknowledge that there is an issue at hand. Now, maybe you’re not necessarily addicted to spending money at Whole Foods or blowing cash on extravagant vacations, but the initial principles for achieving a goal or shaking a bad habit remain the same.
The first step in achieving financial freedom is to acknowledge that some habits may need to change. There is a common quote that comes to mind on a daily basis for myself: “If you are not growing, you are dying.” This simple saying holds much truth not only in the financial world, but throughout many areas in life.
Luckily for us, the road to financial independence is one that has been laid out before us. Although personal finance is rarely taught in U.S. schools, it is still very possible to achieve your aspirations. The road to wealth, freedom, and in some cases an increased quality of life, is a narrow, but time-tested road that we can take together.
2. Analyze your current financial situation
Could you imagine trying to run a business without paying close attention to the cash inflows and outflows of a company's bank account? Just as a business measures and records their finances, I want you to do the same.
Treat your finances as if you are running a business!
How much debt do you owe? Do you have student loans? Credit card bills? Past-due electricity bills?
While it may seem obvious, the second step to end the paycheck to paycheck lifestyle is to calculate your total liabilities (debts) and your total assets (anything of value that you own).
Calculating your assets and liabilities will help paint the picture of your current financial situation.
Imagine trying to play a football game without a scoreboard. The game would be a total mess! Who is winning? How much time is left on the clock? In order to succeed with finances, it is essential to track your net worth as well as your monthly personal cash flow statement.
Calculate your current net worth using this simple formula:
Net worth = Total assets – Total Liabilities
Then, calculate your monthly cash flows by subtracting your expenses from last month from your total income from last month.
For example, let’s say that last month you earned $2,000 and spent $2,800.
Your monthly cash flows for the month would be $2,000 minus $2,800, leaving you with an $800 deficit (loss) for the month. This is an important step in the process ending the paycheck-to-paycheck lifestyle.
Keeping track of net worth and cash flows will allow you to measure progress in the future. so in this case, if you spent $800 more than you earned last month, you can use this as something that you can work for the decreasing the deficit
One of my favorite tools for budgeting is Truebill
Download the app on your phone to keep track of your progress.
3. Set realistic goals
Without deadlines, we can sometimes find ourselves aimlessly moving through life. In some cases, I can seem as though we blink and suddenly 10 years have passed. Setting goals for your finances will put you on a speed track to financial success.
Ask yourself these questions:
What Do you want your finances to look like in 12 months?
What do you want your finances to look like in 5 years?
When you're 80 years old, to leave money for your children and grandchildren?
Read, read and read.
Although it seems that our attention spans have decreased quite significantly in recent decades, reading books can be one of the most impactful ways to create a prosperous financial future.
In my lifetime, I have read hundreds of books ,many of which I was able to access at my free local library.
I urge you to take advantage of books and harness the power of information that encompasses someone's entire life worth of knowledge in a book.
Don’t have time to read? Consider listening to audiobooks with Amazon Audible.
Assuming that you have calculated your net worth and monthly cash flows from the formulas above, the next step is to cut costs. If you are a sports fan, but I’m sure that you are aware of the importance of both offense and defense during a game. In this case, we will need to focus heavily on the defense before we begin to focus on the offense.
Here are three of the largest expenses in American households today:
Now while it is essential to cut the small costs that add up (ex: daily Starbucks). I find it more effective to focus efforts on cutting housing, transportation, and food costs.
Did you know that the average cost of owning and operating a car in America is more than $8,427 PER YEAR?
Playing defense requires you to thoroughly analyze each and every one of your expenses. I want you to ask yourself whether this is a necessity or a luxury. For example, is your Netflix bill a necessity? Or can you do away with it?
For the step, cut as many luxuries or wants as you can. If you truly want to stop living paycheck to paycheck it is imperative that you trim all non essential expenses.
While playing defense is important, it’s nearly impossible to win a game without offense. Once you have cut all nonessential expenses, this is now the point at which you may want to consider increasing your income.
Let’s be honest, there is only so much that you can do to save money. You can only decrease your expenses to a certain level before it becomes a living hell.
There are a few ways in which we can increase income.
The first option is to simply ask for a pay raise.
It baffles me when I see an employee who hasn’t received a pay raise in nearly a decade, simply because they never asked for it. If you are an essential employee, consider asking for a raise. What is the worst that could happen? Will your boss fire you on the spot? (let’s hope not). In most cases, as long as you provide reasoning, your boss may be willing to increase your pay, especially if you have been doing some great work for your employer.
The second option to increase income is to build a high income skill.
What sets you apart from the other 7.5 billion people in the world? A cashier at a grocery store typically gets paid less than average because they can be replaced by millions of other people who perform the same job.
If you want to increase your income, find a way to set yourself apart from the rest of the pack. This is exactly why professional athletes get paid millions of dollars. Very few people can replicate the skills of a professional athlete, therefore making them more valuable in the eyes of business.
Watch this video to learn some ways that you can increase your income:
7. Build Credit
Should you use credit cards? This is a question that I seem to get asked on a daily basis. I wish there was a simple, one size fits all answer to this question. I’ll let you in on a little secret. I myself, have almost a dozen credit cards. Contrary to what some may have you believe, credit cards do not need to be seen as evil. In fact, my credit score is near perfect, I have never paid a single cent in interest, and I use my card reward points to fly across the world to destinations like Paris and Panama for free.
I net roughly 2% cash back on all purchases that I make through my cards in addition to numerous cardholder benefits that include free hotel stays, insurance on purchases etc..
Having said this, I must admit that credit cards are not for everyone. I know dozens of self-made millionaires who use credit cards but I also know plenty of wealthy people who prefer to use debit cards as their primary payment method.
Here are my two cents:
If you are currently in debt or have struggled with credit cards in the past, use debit cards or cash as your primary payment method. Only once you have totally eradicated all debt, (student loans, credit cards, personal loans, car loans, etc.) should you consider opening a credit card for the purpose of building your credit score. If at ANY time you find yourself carrying a balance on the card or struggling to pay the bills, STOP using the card, pay off the bills, and consider putting it away in a drawer.
If you are actively tracking your net worth and monthly budget, credit cards should not pose a problem to your financial health. Take note that I said should not rather than will not. Credit cards are not meant for building wealth. Some people can use them as tools for establishing credit scores and reaping thousands of dollars worth of rewards. Others should stay away from cards altogether.
Track your credit score with Credit Karma