For the first fifteen years of my adult life, I lived paycheck to paycheck. In April of 2005, I got sick and tired of being sick and tired, and I decided to do whatever it took to escape the paycheck to paycheck cycle. Here’s what I did –
1. I balanced my checkbook. I know, this sounds like a very simple, very basic thing to do, but if you don’t know where you are, exactly, then you can’t begin your journey. Balancing a checkbook takes five to ten minutes, and if you have access to online banking, it can take even less time. Find out how much money you have, right now, in your checking account.
2. I checked the balance in my savings account. In April of 2005, I had a grand total of $500 in my savings account. This number did two things. First, it scared me to death, because I knew that all I had standing between me and being absolutely broke was $500. Second, it motivated me. Here I was, a dude who had been working since I was 15 years old, steady, and I had $500 to show for it.
3. I created a list of my expected monthly income and my expected monthly expenses. Fine tuning this list, I created my very first budget. I was amazed to see that I was spending so much money on things that I did not need. After removing a few wants, I realized that I was making enough money to begin my debt reduction.
4. I listed my creditors and the amounts that I owed them. I used this list to create my debt snowball. I printed out three copies of this list, one for my office desk, one for the back of my Bible, and one for the refrigerator. For the entire time I was getting out of debt, this list both angered and energized me.
5. I determined to build a mini-emergency fund of $1000. To this day, I am convinced that the smartest decision I’ve ever made was to fund this mini-emergency fund. Twice during my debt reduction process, I had to dip into my emergency fund, and each time, before continuing with accelerated debt reduction payments, I rebuilt my emergency fund to the $1000 minimum.
6. I put my credit card in my wallet and I left it there. I stopped using credit cards. I didn’t call my credit card companies and cancel my cards. I didn’t freeze them in water. I didn’t cut them up. Much like the dieter who still lives in a world of food, I live in a world of credit. I chose to put them away and live below my means, not above them. I still don’t use my credit cards, except to reserve hotel rooms, for which I then pay cash when I checkout.
7. I found ways to increase my income. I sold a lot of stuff on eBay, I learned to make a bit of money from my blog, and my wife and I had three yard sales.
8. I found ways to decrease my spending. I admitted, to myself, that I was spending too much money on stuff, and that stuff, while enjoyable in the present, was robbing me of a sound financial future. Some stuff had to go. I stopped renting movies, playing golf, listening to satellite radio, and having my clothes dry cleaned.
9. I talked to my spouse, at least once a week, about our plans for the future. It’s amazing how communication can change a couple’s outlook. Instead of thinking about the next month, and how we would make it, we began to dream about our future, and our retirements.
10. I kept going, no matter the setback. I think that this is the most important point of all. Even after my original goal date zoomed by, and I was still in debt, I didn’t give up. I kept pushing forward, until, eventually, I was debt free.
11. I’m still working hard to stay free from the paycheck to paycheck cycle. Life keeps happening. I now have three kids, instead of two, and more responsibilities than at any other time in my life. I can’t back away or shrink back, I have to keep moving forward. Now that I am debt free, I can afford a few more of life’s little luxuries, but I’m always mindful of how it felt to be worried, each month, if there would be enough money in the bank to cover all my bills. I am so thankful that I made the decision, almost four years ago, to do something about my finances.
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I created a budget as though I was going to make 15% less than I did. All the extra money went to savings. I find psychological tricks are helpful like that. 🙂
Great article. I really love this story as it has so much in common with my story! I can truly relate and sympathize to each of those points as I’ve personally been through each one of them trying to reach the same goal.
I love hearing about how people get smart about money, it gives me hope for some family members we’ve been trying to “lightly” encourage. I love that you were so specific about your list! Great job! You’ve come a long way and you should be very very proud of yourself!
I have always been fairly money savvy, my parents taught me well, and I’m a natural born saver, even as a child I preferred seeing my savings account balance rise instead of acquiring new things. My husband came from a paycheck to paycheck family and he’s amazed at how great it is to live with financial freedom. Now if we could only get his mom to see how liberating it is.
I had the same epiphany in 2002, about 3 years into my career. I was making good money but had nothing to show for it, so I started a savings account and started investing. It took me longer to get off the debt addiction, I just paid off the last of $20k in credit cards in Jan 08. This list is a good starting point for someone who hasn’t broken the cycle yet.
Great post, and full of common sense, something that a lot of people are forgetting in what is happening with the economy.
I was taught this method from a kid when my parents gave me an allowence which seemed huge to my friends, but it was this money that I had for everything non-essential (except sports registration). I had to save this money up to buy the gaming consoles, and games and lego. There was never any begging allowed my my house.
Some great advice. The one additional thing I would add it seem you kept on learning and improving yourself in terms of personal finances along the way. That is the key thing to succeed. You can always learn something new or a better way to do things.
@Andy You are very right… it is SO important to keep learning… It is important, I think, to point out, though, that all of our future progress begins with the laying of a strong, initial foundation. If the foundation is solid, the future is solid.
GREAT Post! And things that are simple to do for anyone.
This is the textbook Dave Ramsey. Debt Snowball, debt-free, emergency fund. Wonderful system (common sense to some) and works wonders for those who were not taught by example or education how to develop and follow a budget.
It will save your life and your marriage! And if for no one else, do it for your children. If you struggle with money, so will they. Your children will only duplicate what they watch you do. I refuse to send my children out of my home without giving them the gift of financial peace!!!
That sounds like a great plan. I follow the same plan and one day I will be completely free of working altogether.
I think the best thing to do is create a budget! Every one should have one especially in this economy. You have to plan exactly how your going to spend your paychecks and set goals for yourself. When I have a budgeted plan I feel more in control of situations and more prepared. My budget guarantees me that I won’t be living paycheck to paycheck because I allocate money for savings!
I’ve taken some of the same steps. They really work! Thanks!
Great idea on the budget manipulation, Shaun! Thankfully, a lot more people are becoming very aware of the importance of budgeting and sticking to it. And this post is right on about the importance of a couple discussing finances – it changes your whole outlook!
Way to go! Your method for being more proactive with your finances is very wise. Best wishes and continued successes to you.
One thing I always do is when I get a raise or any extra money I pretend I never got it. It goes straight into a savings account.
Love your blog. I stumbled over here on accident but love it. I am going to link this blog from my own blog (http://beefupyourpiggy.blogspot.com) Thank you again for the tips.
I like these straightforward suggestions. It seems a lot less overwhelming when you break it down into doable steps.
What a great list! This is a powerful post for anybody who is tired of living in the rat race. For me the first step was to create a budget, which I now share on my website: BuildMyBudget.com.
I am courious to find out what type of “emergency” warants your dipping into the emergency fund?
I’m actually employing a lot of the same methods you took on, and it’s working well for me. I still basically live paycheck-to-paycheck, but I’m getting out of debt very steadily, so huzzah.
I did take an extreme step with my and my partner’s credit cards — I took them and froze them in a big block of ice. Extreme, but I’m chipping away at the debt (and not the ice!!).
I read your, “The 10 steps to escaping the paycheck to paycheck living”, it has encourage me to continue with my budget plans and I think I am on the right track after reading your article about living paycheck to paycheck.
I also had to pull my personal credit reports to see what I have on the reports and accordingly set up my budget plans. It’s a wake up call for me also to realize that I am not going anywhere with my personal finance if I continue to live paycheck to paycheck.
Thanks for the info.
I just got married & am doing 3 budgets; his, mine, & ours. We are not using credit cards anymore, but paying cash for everything; the debt reduction is going well. We have a little more than $500 in savings. However, after all the fixed exjpenses are paid, there is only about $240/mo left. But we have a cat & dog that’s not included yet. (My new husband isn’t ready to get rid of his dog nor can I force him (I have become attached to the dog too as my pet therapy). And the water heater, garbage disposal, & carpet also needs to be replaced/repaired. Where do we come up with the money to get these expenses taken care of when we’re trying not to use credit cards, increase savings, & at the same time continue to decrease the debt? Oh, by the way, just when we have all but one credit card paid off next June (barring any unforseen problems), his student loans kick in for the next 30 years. Please respond to my inquiry.
It’s great seeing other people having the same goals we have made since getting married this summer…I don’t feel so alone.
Great article. It’s a wonderful, scary day when you create that list of debt!
It’s important to keep any setbacks in context, and realize that they are just that, and to that end, keeping a credit card handy (never heard the freezing technique, lol) is always a smart move.