Getting a stimulus check or some other windfall like a tax refund or bonus? There are no shortage of “news” articles and blog posts coming out telling you how to spend it. As the inaugural Eighty MPH Dad I thought I’d try to share some “dad-vice” on how I like to budget. I know most people avoid budget talks like the plague, but hopefully my paycheck shifting technique can help you stop living paycheck to paycheck.
Necessities not treats
Growing up my mom always made it a point to not just tell my brother and I no. She would follow it up by opening up the checkbook and showing us the numbers. That way we would know why. When there is “nothing left” your options become limited and you have to wait.
As with most kids, it took me a few years to put it all together, but what my mom was doing was giving me my first budget lessons. Right or wrong they were honest conversations about why we couldn’t do “this” and “something else.” Somehow she always made sure we had the necessities like: food, clothes, and a home, but Little Caesars or a toy were to be treats, not necessary to sustain us.
How many people are living paycheck to paycheck?
What we were experiencing was no different than what most American families experience. Depending on the source nearly 50% and up to 80% are living paycheck to paycheck. You’ve no doubt seen the headlines reprinted that most Americans couldn’t cover a $400 emergency. And this is before 2020. In general what this means is if you walked out your door this morning either you or the two families on either side of you is on the “financial edge.”
That’s the best case scenario going into the wild historic event of 2020. Today it could mean that you and everyone on your street is in the same dire straights. So how can we begin to stop the cycle?
How do you stop living paycheck to paycheck?
First, I won’t lie to you and say it’s just “these # of easy steps.” It’s more like, master this one step. If it’s successful then maybe I will have had time to write another post to give you more “dad-vice!”
One of the first conversations about money Laura and I had (do this before marriage!) I learned she kept a mental balance of her money in her head. Basically if things went below a certain threshold she would stop spending. Not a budget and not the worst practice as she always left herself a buffer, but also no different than living paycheck to paycheck. I on the other maintained a spreadsheet. Yep, I’m that guy. Probably lost some of you there, but hear me out.
Expense or Paycheck Shifting
I won’t bore you with spreadsheets today, but I want to introduce a simple thought process that could help you accomplish several financial objectives at once. Most financial experts will say the first thing you should do is build a cash fund and then pay down credit cards. While those are some of the big steps to achieving some level of financial security, they can be overwhelming. Not to mention impractical if you are spending everything you have as soon as you have it.
After graduating college one of the things I realized quickly is that I was living paycheck to paycheck. I had to scramble to write checks and submit payments once there was enough money in my bank account. I hated it. Student loans, a graduation gift to myself in the form of a car payment, rent, utilities, groceries, cell phone, and on and on.
So what could I do? I received my first tax refund as a grown-up about 8 months into my first full year of adulthood. What I decided to do was start thinking about my current paycheck as coverage for the bills coming up right after my next paycheck. For example, if I got paid on the 15th, then that paycheck would be for next month’s bills. Rather than using my paycheck on the 30th for things like rent due on the 1st.
The impact of paycheck shifting
It was such a simple concept, but it made a huge difference. I no longer had to worry if my paycheck would land in my bank account before my apartment cashed my check. I no longer had to “wait” for the next paycheck to handle things over the following two weeks. It was like a huge weight lifting up allowing me to have breathing room.
Now, you don’t have to start with something as big as rent or a mortgage. It will depend on the size of the windfall. You may want to start smaller with a utility bill or some other recurring necessity. The point is to begin building a buffer.
Once you’ve fully shifted your paycheck forward, the next part is to start pretending like once a year expenses were recurring. For example, instead of paying for auto insurance monthly I was able to use a windfall to pay annually. From then, on the monthly amount I would normally have spent would go to savings for next year’s payment. Not only did this save me money (annual insurance is usually cheaper than monthly), but it allowed me to earn some interest on the savings.
Once I started to think about it more it actually began to allow me to have a natural “emergency” buffer. There’s no way I could have handled a real emergency living paycheck to paycheck, fresh out of college, and having no savings. However, with this one mindset shift I created a window where I could absorb a short-term shock like a job loss (or new tires or, or, or!). At least giving myself room to apply for unemployment and start a new job search.
There are so many things you can do with a windfall. And based on the latest stimulus bill, a potential for a significant windfall. If you are living paycheck to paycheck you should definitely consider building in a buffer by shifting your mindset ever so slightly.
In the future I’ll cover tackling the other financial goals, but for now, just try something simple. I promise it’ll bring some relief.
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