How To Stop Living Paycheck To Paycheck.

The first rule is to earn more than you spend, simple right? Not to most Americans. According to a CNBC, almost half of all Americas are living paycheck to paycheck. In order to get yourself out of this mess, you need to track your income and expenses…you need to create a budget. A budget can sound scary to some people but if you really want to become Financially Independent, you need to know where your money is coming and going.

budget

I don’t look at my budget to the penny, If I go over some areas, I don’t cry about it. It happens, I only live once and if i want to eat out I will! However I do have a very good idea on where my money is going and how much I can spend in each category each month. I have allocated $300 a month for new clothes for the whole house and $300 a month for eating out. My budget makes me think twice on where to go for dinner and if I really need that new pair of shoes this month.

To calculate how much you spend on Gas, Food, Insurance etc, take a look at your last three months bank statements and average out your costs. This will give you a good idea. Separate the Income from the Outcome and then total it up. This may even shock you. Once you find your comfort level you will be able to plan your life better.

Income
Job 1 $3,000
Job 2 $2,750
TOTAL IN $5,750
Outcome
Mortgage -$1,750
Car -$400
Gas -$100
Insurance -$200
Food -$800
Kids Ent -$350
Gym -$150
Cell Phone -$80
Cable/Int -$70
Holidays -$300
Oil -$150
Electricity -$100
Water -$25
Entertainment -$400
TOTAL OUT -$4,875
NET $875

This example gives person A $875 a month left over. What do we do with this extra income? If you want to become Financially Independent you need to invest it. Following the JLCollins approach, I have my extra funds invested in VTSAX . This is a low cost Index Fund which charges 0.04%. You need a minimum of $10k, if you don’t have this do not run away or close this article, you have two options.

Option 1 – Save up enough to open this account (1 year).

Option 2 – Open a different Index Fund (like S&P 500 and once you have over $10k, transfer it).

I prefer option 2 as your money will be invested the whole time. Budgets are boring, but they are important as they set the foundations for taking responsibility. I spent over 50 hours a week at my office, I’m not doing this for nothing. So look at your statements and work it out. This may force you to make some drastic changes.

After I completed my budget, I took a few simple steps to cut back on my cell phone bill, cable, electricity, auto insurance and my house alarm. By doing this I gave myself a $10,000 payrise. I will post more about this shortly.

One thought on “How To Stop Living Paycheck To Paycheck.

  1. Agreed that you need to know exactly where your money is going! I use Mint to monitor my spending, even though I don’t have a budget anymore. You can also use it to create a budget, and it can send you reminders when you go over. 🙂

    Like

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