One of the things that I disliked the most about life pre-No Credit Needed was the pressure of living paycheck-to-paycheck.
Prior to getting serious about managing our finances, I struggled, always living on that fine line between just-enough and flat-broke. One of the joys of my current lifestyle is that I have broken the cycle of paycheck-to-paycheck.
Before I proceed, let me point out the following: Our annual household income, as compared to five years ago and adjusted for inflation, is roughly the same. Most (if not all) of the progress we’ve made has resulted from changes in behavior and better planning.
Here’s how I managed to escape paycheck-to-paycheck and get (at least) one month ahead of our financial obligations –
1. I simplified and organized my finances. It takes just a few hours once a month to create our monthly budget. It is extremely important to me that I am well-prepared for each month, understanding that particular month’s expenses, opportunities, and obligations – and that I also understand the relationship between a particular month’s expenses and annual expenses.
2. I committed to a fully-funded emergency fund. In our ING Direct online savings account we have enough cash reserves to cover six month’s worth of expenses. This account is for emergencies only (think job loss or long-term illness) and is not used for anything else. (At one point, I tapped out emergency fund to help pay for the purchase of a newer automobile. I did not like living with an under-funded emergency fund and vowed never to tap into it again, unless absolutely necessary.) This fund provides sleep-better-at-night security.
3. I temporarily (and in some cases, permanently) decreased monthly billable expenses. The goal was to have several months, in a row, where our monthly bills were lower than they had previously been. I found ways to decrease bills for electricity, gas, satellite television, phone service, and cellular service.
4. I began to save for the coming month’s bills. Once the current month’s bills were budgeted-for, I then turned my attention to the next month’s. At first, it was difficult to find enough “extra” to go towards the next month’s bills. Over time, however, I slowly began to build up additional cash reserves. After several months, I had enough money in savings to cover an entire month’s worth of household expenses.
5. I deposited an entire month’s worth of pay into savings. This was the tipping point. After years and years of living paycheck-to-paycheck, I finally arrived at the point where I could deposit an entire paycheck into savings – and live an entire month without “touching” that money.
In effect, I have created a system where all of our income can be treated as irregular income. I don’t have to worry about when I get a paycheck (before Christmas or after) or fret over slight fluctuations in take-home pay. In fact, I no longer base my monthly budget on my monthly income – a mistake I made for years and years. Now, I base my monthly budget on actual needs and wants!
In an odd way, living paycheck-to-paycheck actually gave me an excuse to spend more money. How? In a “good” month, I’d spend every penny, and in a “bad” month, I’d rack up credit card debt. I always promised myself that, come the next “good” month, I’d pay off the debt, but I never did. Instead, I rewarded myself with foolish purchases and wasteful spending.
Now that I’m no longer tied to the income = expenses model, my spending has evened out. Over time, I’ve managed to move from one month ahead to several months ahead, with a comfortable savings buffer.
One final note: I still use a zero-based budget to manage our income. When I say that I “no longer base my monthly budget on my monthly income”- I’m not saying that I disregard how much money I make and how much I spend. What I’m saying is – Instead of planning my spending according to a given month’s income, I now plan my spending according to a given month’s actual expenses. Each dollar that comes into our house is still routed through our budget, and given a purpose, but the budget is no longer driven by income. It’s driven by anticipated expenses and savings goals.