Hello best life seekers!
Do you have more month left at the end of your money rather than the other way around? You’re not alone. At least 78% of working Americans live paycheck to paycheck and 71% are in debt, with over a majority of those reporting they are in over their heads. And these numbers are growing year over year. Yikes! How do we get control of our finances?
Here are 5 quick tips to take back your paycheck starting now. These tips helped me take control of my budget and in ten years I went from drowning in debt to being financially free. Maybe they’ll help you do the same.
#1 – Have a Budget
Okay, this is pretty basic but you’d be surprised by how many people forget to do this. Only 41% of Americans actually use a budget, which means 59% are spending money in the dark. Winging it won’t work. Not knowing your net income each month or your regular expenses and allocating for them and other items is a recipe for financial disaster which we see playing out across the country – as the stats on living paycheck to paycheck and debt clearly show.
Here’s why budgeting is important:
- Helps you come up with a solid plan on how you will spend and save your money, ensuring that you have enough funds for the items you need – and can save for other items you want.
- Helps you avoid getting into credit card and other debt and incurring hefty finance charges on any money you may need or choose to borrow that you don’t have on hand.
- Helps you set and reach your financial goals at any stage in life, whether it’s saving for your first house or preparing for retirement.
- Forces you to only spend what you have allotted toward any one item, and gives you the peace of mind that at the end of the month, you will have all your bills covered.
- Helps towards savings for rainy day or extraordinary expenses, as well as long-term savings such as your kids’ college or retirement.
With a solid budget in place, you are in control of your money. Plenty of resources exist on the net on forming and keeping budgets, free budget software is available, and you can find a plethora of personal finance education resources online as well. If you don’t have a budget, this is where to start. Then stick to it.
Want to know how I went from crazy debt to financially free in 10 years? Start with my article on budgeting basics called Do This or Live Broke – Know Your Wealth.
#2 – Read Up on Money
Who doesn’t want more money? Very few people. But hardly anyone wants to read about oh so sexily titled “financial literacy” or “personal finance”. These words make our eyes glaze and again, it shows in the stats on debt and living paycheck to paycheck. Don’t think about it as reading boring finance stuff you’ll never understand. Think of it as reading about easy ways to have more and more money. Because that’s what financial literacy, aka understanding your personal finances, truly means.
In case you think personal finance is difficult and requires long math equations you sucked at in school or never took, you’re wrong. Budgeting requires only 4th grade math. It’s addition and subtraction with a little multiplication and division – and you can use a calculator. You’re smarter than a 4th grader right? When it comes to retirement or long-term goal setting and achievement, you’re still only using those math skills from 4th grade. Even percentages are grammar-school math. It’s just not sexy to anyone but finance nerds.
But you know what is sexy? Telling people you’re richer at the end of the month than when you started it.
Don’t let the big words fool you on bank sites or in the financial literature. That’s just banks and financial institutions trying to scare you so that you’ll leave your money with them – and preferably pay them for the service of managing your money. Words like “allocation” or “diversification” are just big talk for “how much and where to put your money” and “don’t put all your eggs in one basket”.
Read blogs and listen to podcasts that are basic and easy to understand – whichever ones make most sense to you and which you don’t mind reading or listening to. There are ones that are right for you. And you don’t have to major in this stuff. It’s actually pretty simple once you get your head in the game.
Financial literacy is part of Adulting 101 and remember, education is power. Get power over your finances. Start with my Secret Money Formula for some quick and easy reads on money basics.
#3 – Stop Paying for Meals
We’ve talked about building a money framework but let’s give you some quick tools for cutting down on the excess spending. One of the biggest places we blow our money is on dining out – whether that’s the daily Starbucks run or buying our lunches rather than packing, and dining out socially.
Of course life would suck if we didn’t have any fun but a daily Starbucks coffee will cost you $100+ a month for just coffee and we all know you’re not just grabbing a coffee. You’re grabbing a treat too. Do that 20 times a month and you’ve blown a lot of money. If this is you, make it a weekly treat for gloomy Mondays to start out your week or Fridays to celebrate the close of the week. Coffee is usually free at work. Take the free money and treat yourself once a week.
Similarly, buying your lunches or breakfasts adds up. You’ll be ballparking between $7-15+ per meal but even if you’re just grabbing a $2 breakfast burrito and coffee at McDonalds, that’s money blown and it adds up fast. It’s simply cheaper to pack your meals and healthier too. If you’re buying meals left and right, use the trick above for coffee and make it a once a week treat for yourself.
Dining socially and going for drinks can blow tons of money. In cities like DC, a mediocre meal will set you back $25-35. Drinks start around $6. And just like that, you’ve lost $40 in one night. Do that several times a week or month and you’ve really hit your wallet hard and blown your budget. We’re social animals and we want to enjoy living, right? Going out with friends and family is what we love.
What we actually love, though, is the camaraderie and the feeling of inclusion and maybe some ambiance. Do you really remember all the meals you ate with your friends or spouse? Probably not. They’re sort of unremarkable unless they were for special occasions. Ditch the repetitive habitual spending by inviting people over for dinner or drinks or having weekly potlucks or family Sunday rather than always going out to enjoy each other’s company. You’ll probably up the quality and the memories while saving your cash. Make going out a treat, not a routine and find other ways to build memories.
#4 – Ditch the Extracurriculars
We pay a lot for those big and small “extracurriculars.” A Starbucks coffee, as seen above, will rob us easily of $5 a day. Cigarettes will really rip apart your budget. Roughly 14% of Americans’ incomes are spent on cigarettes. Low-income earners in states that have higher taxes on cigarettes spend 25% of their money on cigarettes. Meanwhile, nearly as many people use cannabis (22% of adults currently use it, with 9% of adults regularly using it and those numbers are growing as more states legalize. Average use works out to around $653-$1000 annually depending on cannabis quality but heavy users can drop upwards of $1800 a year.
Americans also spend roughly 1% of their income on alcohol. Drinking habits vary but consider this: If you have three drinks a day, five days a week, at an average of $10 a pop, you’re spending $150 a week, $650 a month or $7,800 a year just on alcohol ― not including any additional costs, like server tips or taking a taxi instead of driving. Even if you drink only on weekends, at two drinks per day you are spending about $2,500 a year. Meanwhile the cost of a bottle of white wine averages $14.41, while an average bottle of red wine costs $15.66. If you drink one each per week for a year, that’s more than $1,563. If this is you, consider buying your drinks retail rather than going out for them, finding better deals on your purchases, or cutting back. Fair warning: don’t get drunk. We spend $448 per person on drunk purchases, i.e. shopping while drunk, a year.
How much are you spending on these extracurriculars?
#5 – Rent Check
As we look at where our money goes, it’s good to know some hard numbers on spending. For instance, you shouldn’t be spending more than 35% of your income on housing. That’s the upper limit. Banks and lenders all know that beyond this number, people’s finances grow risky. If you’re paying more than 35%, you want to move to more affordable accommodation.
Sometimes we don’t notice how expensive our housing has gotten. A 10% increase each year doesn’t make most people blink and doesn’t seem worth the hassle of moving but over time, this really adds up. An apartment going for $1000 a month will see rents rise to $1100 a month or an extra $1200 after a year. If you’ve live in the same apartment for five years though, you would see your rent rise to $1464 at the start of the 5th year, $464 more a month than what you started off paying or $5568 extra lost that year alone on rent. That could have been your IRA contribution in full. Gone.
This sort of rent creep happened to me. I went from paying roughly $1100 a month in 2008 to $1400 in 2013 for the same apartment. Facing another raise in rent, I left the apartment and rented a room in my friend’s awesome house at $700 a month, all utilities included. Best financial decision I ever made!
If you’ve been in the same place for a while, it might pay to look around. Apartments sometimes give lucrative discounts as move in specials. Maybe you’re currently paying for all your utilities and another place would cover them, saving you money. You might also consider getting a roommate. Or maybe you’re now paying so much in rent that it might actually be cheaper to buy your own home at this point. Consider your options.
Bottom line: don’t spend more than 35% of your income on housing.
Be Richer at the End of the Month
Smart money habits lead to more money at the end of the month than what you started with. That builds wealth and the opportunity to weather unexpected challenges, have less money anxiety, and save for retirement and other goals. To get on track:
- Have a budget
- Educate yourself on money
- Cut back on eating out
- Cut back on extracurriculars like coffee, cigarettes, alcohol, pot, etc.
- Don’t spend more than 35% of your income on housing
By looking at these 5 areas in your life, you should be able to trim some waste and get back on budget – or at least start heading in that direction. Remember: Don’t live paycheck to paycheck. Be richer paycheck to paycheck.
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