I realized that not everyone is at the wealth-building stage of their lives. It's been a few years for us since we started consciously to begin saving and investing so I overlooked this stage recently. Most of our twenties were focused on juggling many new responsibilities as an adult: building careers, managing friendships, dealing with relationships, paying bills, and many more that personal finance got pushed aside. It's a tough period and if you did not grow up learning to budget, save money, and invest in assets, this would be a difficult topic.
Living paycheck to paycheck is one of the most stressful times one can go through after health issues. You feel like you're barely keeping your head above water and not improving your life situation in any way. You're running a circle in a wheel and blame many factors like luck or opportunities that you did not get. Although these may be true, majority of the successful people got to where they are with a plan, hard work, and execution.
Below are some ideas that should be considered that could help you from living paycheck to paycheck and moving forward in life.
1) Find Sources of Income
In order to execute any plans like budgeting and saving, you need to find a consistent source of income. It can be from gigs, part-time, or from your wages, but it all starts with gaining a source of income (read: Ways to Diversify your Income).
2) Live Within Your Means
Because other people are buying things or going on travels does not mean that you also need to do those things if you are trying to get out of living paycheck to paycheck. Everyone's situation is different and they may have gone through their fair share of hardships in the past that you may not know about.
Because you're trying to make drastic changes to your life, you have to live like no one else now, so that you can live like nobody else later (read: 10 Smart Money Habits We Try to Follow).
3) Budget, Budget, Budget
The single most crucial thing in order to build wealth starts with budgeting money coming in, setting aside savings, and spending what you have left. If you want to build wealth immediately from day one you need to plan how your money will be allocated each month. Some of the largest expenses include Home and Food. If you're getting a nice apartment because others are too, but that apartment is 50% of your income, you're not going to be able to get out of the cycle.
In my opinion, breaking down your take-home pay into four categories: Housing (25%), Savings/Debt repayment (25%), Investing (25%), and Living Expenses (25%) is a good formula and your ultimate goal. But breaking down the pie into three categories: Housing (33%), Savings/Debt repayment (33%), and Living Expenses (33%) can be a good start (read: Create a Budget, Track Everything).
4) Pay Off Debt
The interest you're paying on student loans (~7%), or credit card balance (~25%) is simply money that you should not be spending. If I can make a 25% return on my capital each year, I would be one of the best investors in the world. So why would you make other people that kind of money? In the above budget example, outside of housing and living expenses, you should be putting every dollar you can towards paying off the debt.
It can take years, but you need to be debt free by paying off your debt from the ones with the highest interest rate. Another strategy is debt snowball where you pay the smallest balance first and work towards eliminating a number of debts (Financial Things I Wish I Knew in My 20s).
5) Reduce Expense as Much as Possible
This one goes one step after living within your means. Living within your means not going into debt and spending what you have. In order to get out of living paycheck to paycheck, the more you can save each month the faster you'll get there.
This includes reducing your expenses as much as you can. For example, if you budget 25% of your take-home pay on housing, and that comes out to $500, you should be living with a roommate or moving back with your parents. If you budget 25% on living expenses and your necessity such as grocery and shopping expenses takes up your entire category, you should not be adding car payment. You have to make your budget work by eliminating and avoiding any expenses that you think are essential but are really not (read: 10 Ways to Save Money at Home).
6) Raise Income as Much as You Can
After you have found a source of income step one above, you can try to earn more money by taking on additional work or side hustles. By maximizing your income, you can achieve your goals faster: paying off debt, saving cash for purchases, and investing and building wealth.
7) Stay Consistent to Above Six Steps
If you sprint out the gate and minimize your spending for three months but you were too extreme and spend your money to buy all the goods that you've wanted to buy, you're going to fall back to square one. This may take several years of consistently bringing in consistent income, budgeting to ensure you don't overspend on one category, and saving money or paying off your debt.
8) Buy a Modest Home
Once you have paid down your debt and now regularly save cash, you can start to invest in order to build wealth. One of the most common wealth builders is through homeownership. Everyone needs housing, but instead of paying rent, you can be earning equity by owning your own home. In order to continue saving and investing to grow your assets, you should buy a home where you are still continuing to budget 25% of your take-home pay. This means living within your means and not buying a home that will make you house-poor (read: How Much Home Can I Afford).
9) Invest in the Stock Market
At this point you could be moving from the three categories (Housing, Savings, Living Expenses), to the four categories Housing (25%), Savings (25%), Living Expense (25%), and Investing (25%). The easiest way to invest is investing in index funds consistently for the long term (read: Easy Method to Investing).
10) Plan for Retirement
What's the point of getting out of living paycheck to paycheck if you have to work for the rest of your life? Planning for early retirement and reaching Financial Independence is the goal of my site. Reading up on financial content can help you stay fit in your personal finance and through this site I hope I can share ideas to better achieve this goal (read: How I Plan to Retire Early in Our 40s).
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