How Not to Live Paycheck to Paycheck on Any Salary
With COVID-19 still in full force and the reality that businesses are closing, peoples pay are being reduced and some even loosing their jobs, I thought I’d share the uncomfortable truths I’ve learned about budgeting.
They say if you can make it in New York you can make it anywhere and I’d have to agree. I’ve been making it here since 2009 with a starting salary of $45,000 a year and huge expectations for what life in the city would be like.
21 year old me learned very quickly that if I didn’t want to rack up credit card debt that was going to mean doing my nails at home, bringing my lunch to work, and turning down invitations to go out for drinks. Before I got my first paycheck and realized the harsh reality of Gross vs Net income, I had imagined myself strutting down the street in a fresh pair of Manolo Blahnik shoes to meet my best gal pals for brunch. In actuality, I was wearing a pair of knockoffs from Zara, free samples from work, and an expression of disappointment. So how did I get expectation to meet reality and create a lifestyle I love while being debt free for 11 years? Let me show you exactly how.
#1 : Calculate your Net Income for the month.
This is the exact amount of money you will have to work with each month to build your lifestyle around. If you’re already overspending and have accrued some debt this number might be very sobering, and by that I mean you’re probably questioning if you should go out for another happy hour in a long while. Don’t get discouraged, this exercise is focused on building up not demolishing your lifestyle and is meant to give you the facts and clarity. To do this you will need to start with a clean slate, so forget for a moment ,what you are currently spending and move on to Step 2.
#2 : Take the Net income of your first paycheck and write that down as your rent/mortgage.
Try not to judge this number. Look at it and imagine what kind of home you can create with that budget. Now there are a lot of circumstances that play into this and I get that. You might be single, or in a partnership where expenses are split or income based, or maybe you’re the sole provider for a family, but don’t let those circumstances influence the number by trying to add more to it. The whole purpose of this exercise is to create with what you have.
#3 : Take the Net income of your second paycheck and write that down. Below that number write in all of your current expenses.
The best way to do this is to look at last months bank statements. Don’t hold back, really write down everything, even that $3 cup of coffee. These purchases are what make up our lifestyle and as we continue this exercise we will look at how this list can become a reflection of the things that are most important to you. When you’re done this list should consist of utility bills, insurance payments, personal care expenses, subscriptions, memberships, pet care, child care, laundry, groceries, and recreations.
#4 : Put a * next to everything on the list that is an essential or a bill and write down the portion of the bill you are responsible for.
Total up the spend on these essentials and see how much you have left to work with. As a rule of thumb these expenses shouldn’t consume more than half of your second paycheck amount. If it equals your entire second paycheck, is there something you can remove from the list so that you are only left with what is truly essential and that provides true value to your life.
#5 : Put a ❤ next to the items on the list that are good for your physical and mental health. Without our health it’s hard to enjoy our hobbies so this takes priority over those activities.
For me this includes green juice and protein powders, the Headspace meditation app, at home workout subscription, and my probiotics. I didn’t start out with all of them and have built up over time the purchases that get considered in this category. When I first started budgeting I was only using a $27 a month green juice powder which was all I could afford at the time. Again the point here is to keep what is truly essential and what provides the biggest bang for your buck.
#6 : Put the remaining expenses into a pie chart where the largest pieces of pie represent the purchases or experiences that bring you the most joy.
Based on what is left of your disposable income after essential bills and health look at your top 3 from the pie chart and budget them in. The truth is there are only so many hours to do the things that we enjoy. By picking your top 3 you can devote more time and money to the things you love to do.
#7 : Any money left over goes to savings/investments.
For most people this will be an aspirational category but even if its $20 bucks. Let’s say you took $100 from your tax return and added $20 a month for the next 5 years. When you compound that $100 becomes $1300 and all you did was put in $20 a month. Now thats what I call easy money.
And that’s it! 7 steps to creating a budget that allows you to live within your means and is filled with all the things you love to do.
