Today I want to address something that we all need to watch out for if we want to continue growing our money – drifting into a “Paycheck-to-Paycheck” lifestyle. If your last paycheck is just enough to cover all of your expenses and obligations until your next paycheck comes, with nothing left over from your last paycheck for savings and investments, then you’re living paycheck-to-paycheck. Many people live this way, sometimes out of sheer necessity due to difficult life events or poor economic conditions in their community. Let’s pray that they have the means to better their lives financially as they strive to make ends meet, and if you know someone stuck in a paycheck-to-paycheck lifestyle through, help them to get back on their feet where you can.
For many others, living paycheck-to-paycheck has morphed into a lifestyle of choice, what I’ll call living in “PTP mode.” For those who have decided to live in PTP mode, change is needed if there will ever be any hope of growing your money, which is what this site is all about! Let’s dig into this topic to get you well on your way out of PTP mode and into the path of growing your money:
Getting Stuck in PTP Mode: Both Gradual and Habitual
One of the ways people get stuck living paycheck-to-paycheck is by gradually taking on more bills, leaving them vulnerable financially which creates even larger bills, until they feel trapped in a never-ending cycle of feverishly waiting until the next paycheck while also hoping that their delicate balance between paycheck and expenses will not be ruined by an unexpected event. The foundation of such a cycle may sound like this: “I currently make more than I spend every month. Surely I can take on a few more monthly payments.” A few more monthly payments will not necessarily set you up for financial pain, but it could if it leads to this reasoning: “Well, I’ve been handling these monthly payments so far and have some extra money from my paychecks each month. I’ll go ahead and buy XYZ using the rest of my paycheck money; I’ve done the math and I will come out even each month. Plus, I’m expecting a nice raise soon which will give me back my extra money.” This is exactly the type of thought pattern that leads people to gradually get into PTP mode: Bills are gradually taken on based on the assumption that everything will be fine in the future, or even better, until one day their entire paycheck is consumed by monthly expenses.
Another reason why some are stuck in PTP mode is simply poor spending decisions which have become habitual. They get their paychecks and fall into their usual spending habits – eating out everyday, going out to movies when they feel like it, shopping every other weekend, and so on. If there is any money left over from their paycheck, out of habit they look at it as a green light to spend, rather than as an opportunity to save. Spending is fine, per se, but not to the point of having no money left over for saving, investing, and the occasional emergency. Yet, those in habitual PTP mode live for today without regard for tomorrow.
Why is Living in PTP Mode a big deal?
So why is living paycheck-to-paycheck a big deal? After all, as long as you don’t spend more than you make and everything continues going just fine, then no worries, right? Short-term, maybe. But settling into PTP mode long-term comes with many risks and consequences. I’ll point out a few:
Living Paycheck-to-Paycheck Creates Stress
Sure, you may have the delicate balance between income and expenses just right, but what if something happens that throws your balance out of whack, such as medical bills, a car repair, or some other emergency situation? Even if nothing happens, the worry and stress over something that COULD happen is still costly memtally and emotionally. Those living in PTP mode forsake the comfort of knowing that they have something to fall back on in worst case scenarios.
Living Paycheck-to-Paycheck Opens You Up To Credit Card Debt Risk
Again, you may break-even for a while, even a long while, while living paycheck-to-paycheck. But sooner or later some emergency may come up that is larger than what you can afford through your paycheck alone (remember, you’ve already committed most of your paycheck to other bills and expenses!). This means that, unless you have benevolent family or friends, you’ll most likely need to use a credit card to cover that emergency expense. Even if you have an Emergency Fund that you can use to cover that expense, how are you going to replenish your Emergency Fund afterwards if you’re stuck in PTP mode?
There’s an Opportunity Cost to Living Paycheck-to-Paycheck
If you live paycheck-to-paycheck, never saving anything for the future, how are you going to take advantage of opportunities that may come up? For example, if you desire to own a home, how are you going to afford a down payment when your dream home comes on the market if you haven’t saved anything from your paychecks? Committing all of your paycheck to bills gradually and to habitual spending will leave you no choice but to miss out on opportunities that require more cash than you have left from your paycheck.
Living Paycheck-to-Paycheck Means Compound Interest Is Working Against You
Compound interest is a great phenomenon. How could we exponentially grow our money without it? But understand that just like compound interest can work for you exponentially, it can work against you exponentially the longer that you hold credit card or loan debt. Having this understanding can help you make better decisions about when and how much we take on debt and service, if any.
Tips For Getting Out of PTP Mode
The good news is that just as you have made choices which have led to a paycheck-to-paycheck lifestyle, there are choices that you can make to get out PTP mode. Here are 5 tips to help:
1. Challenge Your Assumptions
Part of the reason why you are in paycheck-to-paycheck may be because you’re living off of assumptions that everything will be rosy in the future; your pay will increase and there will be no major emergencies. Take a moment to challenge whether these assumptions are fair to believe, and, even if they are, whether your financial habits are taking advantage of these habits wisely (saving during the good times) or poorly (living in PTP mode).
2. Assess Your Financial Situation
You may not even know that you’re living paycheck-to-paycheck! Take stock of your financial situation to see what is really going out in bills and expenses on a monthly basis.
3. Cut Or Reduce Expenses Immediately To Create Some Room
Find expenses that you can either cut or reduce immediately to create some wiggle room. These may include bills such as monthly subscriptions, cable, internet, cell phone, or gym memberships.
4. Commit To Always Saving a Percentage of Your Income
Create a new long-term habit: Commit to saving a percentage of your income every month. You can start out small, say, 5%, and then gradually work your way up to, say, 15-20% or more. I suggest never going below your starting percentage again though.
5. Automate Your Saving
Direct your new-found money into a savings account and, eventually, investment accounts (retirement and/or taxable) automatically. Here are 3 ways you can make this happen.