Why We Choose to Live Paycheck to Paycheck

By | 2016-07-29

99% of the time living paycheck to paycheck has a negative connotation associated with it. It usually means you would be unable to cover upcoming expenses without your paycheck clearing in time to make the payment.

Even though we have a positive net worth, an (almost) fully stocked emergency fund and make above average incomes we choose to live the paycheck to paycheck lifestyle. I don’t want this post to be offensive to anyone who is living paycheck to paycheck, in fact the entire goal of this site is to help people get out of that situation. But I do think there are distinct benefits if you operate this way while saving instead of spending.

Read on if you are wondering what benefits I have identified by living this way.

Quickly lay out a typical month:

2 paychecks

  • Money is automatically withdrawn/transferred into 401Ks, Emergency Funds, Roth IRAs and Brokerage accounts
  • Our Credit Card and Car loan get paid with the first check
  • Second paycheck covers our mortgage and student loans
  • If one of those paychecks didn’t come, we would not be able to cover our monthly bills

 I refuse to take money out of any of the above accounts to cover normal monthly expenses. This forces us to live on the paycheck to paycheck plan, it is like that money never existed

Benefits we experience living paycheck to paycheck

Automate Saving

As you can probably tell from above, this plan works well with automation. It’s easier to take set amounts on payday than to predict remaining balances at the end of the month.

Without automated savings my entire financial plan would crumble.

Prevents Lifestyle Inflation

When we get a salary increase our automatic deductions are increased along with it. I figure out how much higher our check is going to be and strip out the difference on payday.

Since we know we are capable of living a semi-frugal lifestyle on our current wage, we save more instead of spending frivolously. A few years ago we only saved 50% of a salary increase, for the last year it has been 100% (and will continue for the foreseeable future).

Lifestyle inflation is a sneaky beast – control it.

Indicates Our Threshold

We have slowly increased our savings rate over the last 2-3 years, forcing ourselves to live paycheck to paycheck highlights the natural break in our spending vs saving. If it is tough to pay our credit card bill for a few consecutive months, I know the balance between saving and spending is being pushed and something needs to give.

It is important to feel the burn, if you are uncomfortable you are probably doing something right. However there is a fine line between an effective strategy and constant unnecessary stress – find your balance and set a goal.

Prevents Spending

Since I refuse to use savings to cover normal spending we are forced to track our bill and make sure it stays in a range I know we can cover. If we spend to much early on, we take a few weeks off to balance it out.

We are big believers in only spending on things that truly bring us joy, it is a lot easier to cut out the crap when you hide money from yourself and pretend it doesn’t exist.

Take Aways:

This method may not be for everyone, but it forces consistently and takes lifestyle inflation out of the equation. Our savings rate is hovering around 36% right now and will (hopefully) go up if we get our in process raises. If you struggle with spending everything before getting a chance to save it – try this method out for a few months.

It does take some discipline, and you will occasionally feel some pressure to pay all your bills as your savings rate increases. Embrace it and use it as a motivator to earn more or spend less.

Everyone is in different financial situations, maybe you are living paycheck to paycheck because of overspending, are underpaid, deep in debt, or have had a few bad breaks. These posts can help you move from living paycheck to paycheck out of necessity, to willingly:

Does anyone do something similar? What are your thoughts on living paycheck to paycheck willingly? 

Some products that can help you:

Disclosure Policy

Personal Capital: Personal Capital has a ton of great Free features, you can track your spending, net worth and even analyze your portfolio. It has top notch security and I am able to connect all of my accounts. Saves a ton of time!

Sofi – I saved a ton of money using SoFI for a Student Loan Refinance. They are great to work with, the process was super easy (compared to my previous refi) and I got a great rate. If you have student loans be sure to check them out.

31 thoughts on “Why We Choose to Live Paycheck to Paycheck

  1. [email protected] Smarter Decisions

    That’s a really interesting plan but it makes a lot of sense – and I guess we have did that at one point too. By prioritizing those investing, retirement accounts, savings – and just using the rest for the monthly bills – it definitely can keep you on track. Paying yourself first!

    Reply
    1. Apathy Ends Post author

      Thanks Vicki – Absolutely, finding away to keep monthly bills down so you can actually pay yourself first is key

      Appreciate the comment!

      Reply
  2. Jon @ Be Net Worthy

    We use the same principle, but approach it differently. We have all deposits, regardless of source deposited into one account. Regular investing and saving is pulled from this account. Once a month, we automatically pull a fixed amount into our “monthly bills” account and that is what we live on. It works pretty well for us and keeps the lifestyle inflation at bay. If the deposits account starts to accumulate too much of a balance, I made an extra payment towards our mortgage.

    Reply
    1. Apathy Ends Post author

      Thats an awesome system and something I might look into doing, the only thing that I could see de-railing it for us is inconsistent credit card bills, but we stay in a pretty tight range so it might work

      Reply
    2. NZ Muse

      This is pretty similar to my set up! Works well when you have generally gotten into a regular groove.

      Reply
  3. Fervent Finance

    Whatever works for you is the right way for you. I take a different approach where 401k and HSA are my only automatic investments. When I get a paycheck I look at what outflows I have over the next two weeks. Whatever is left over gets invested in the brokerage account. I don’t like automating my brokerage savings since my expenses are not very consistent mainly due to personal travel. It seems to work good for me.

    Reply
    1. Apathy Ends Post author

      This plan wouldn’t work well for inconsistent expenses and you are 100% right – you need to find a system that works for you.

      Reply
  4. Ty @ Get Rich Quick'ish

    I’m the same way. Paycheck to paycheck is kind of like a forced budget. When the checking account runs low, we scale back rather than pulling from savings or investments.

    Reply
    1. Apathy Ends Post author

      Agreed Ty, at first its difficult not tap into savings and keep spending but we are used to it now. Its a lot easier to spend less and not be stressed out.

      Reply
    2. Mystery Money Man

      Great post! I agree with both of you on this. Ty, I like how you mention simply scaling back rather than deferring to savings. And the more automation the better!

      Reply
  5. The Green Swan

    My approach is similar to Fervent Finance. I have 401k withdrawals but then manually transfer money from my checking to brokerage once or twice a month.

    I never have thought of it that way but I guess I’m basically living paycheck to paycheck too! Thanks for the post Mr AE.

    Reply
    1. Apathy Ends Post author

      for sure Mr. Swan, if you transfer everything out every month the principal is the same.

      Reply
  6. MrFireStation

    Yep – that’s basically what we did for 25+ years. Pay yourself first (automatic savings) and live on what’s left. Out of sight out of mind wins every time!

    Reply
    1. Apathy Ends Post author

      Hey Mr. Firestation – Agreed! Hide money from yourself for later!

      Reply
    1. Apathy Ends Post author

      Thanks for commenting ZJ – have to push yourself to get ahead!

      Reply
  7. G
    Graham @ Reverse The Crush

    Great post!
    I used this same method for roughly 5 years to build savings. Every pay day, I would pay myself first, then pay the bills and leave myself hardly any spending money. I only left myself enough for coffee and transit and left myself a very small amount to spend. I agree that this is the best savings method as you can just forget about the rest. And like you, I would never take from my investment accounts for expenses, bills, car repairs etc. If you spend your savings then how will you ever get compound interest working for you? I would even go into overdraft before taking from investments. Thanks for sharing.

    Reply
    1. Apathy Ends Post author

      Thanks for the comment Graham, if you keep pulling money out of your savings you definetely screw up the power of compound interest.

      Reply
    1. Apathy Ends Post author

      Hey Francesca – I work as a Project Manager currently, thanks for reading and commenting!

      Reply
  8. Finance Solver

    One interesting thought that I learned in financialsamurai is that if you save 50% of your income, you get to retirement 1 year earlier (because you’re assuming you’ve spent the other 50% of your income and the 50% you save today can cover the next round). I’ve been following this and I automated saving 55% of my salary into 401k (my friends don’t believe me). This makes me have an estimated negative cash flow of $350 every month (I don’t count money into my 401k as a positive cash flow) but I have $2100 to cover me for the next 6 months, and by then I’m going to switch my savings amount so that my cash flow becomes positive.

    I’m trying my best to save aggressively so that I don’t have to live paycheck to paycheck and be dependent on my employer to live. I do see that it’s nice to not have to worry about saving because of automatic deductions!

    Reply
    1. Apathy Ends Post author

      That is an intense plan – The longer you can keep it up the better off you will be. I hope you write a post about your experience with a negative cash flow

      The ultimate goal is Financial Independence, which makes the paycheck unnecessary so our goals are the same on that one.

      Reply
  9. Matt @ Distilled Dollar

    We ride our cash buffer pretty low (typically 1-3 months of expenses). We approach it similar to you, with so much going into pre tax accounts. It helps reduce lifestyle inflation as you mentioned.

    Reply
    1. Apathy Ends Post author

      For sure Matt, I should have noted that the highest percentage goes into pre-tax accounts.

      Thanks for reading and commenting

      Reply
  10. Jeff Proctor

    I have to say, your title caught my eye and I just had to read. This actually reminds me a lot of Dave Ramsey’s philosophy of “every dollar should have a purpose”, it sounds like that is exactly how you are approaching your monthly budget (and automating your savings is a HUGE key to being successful with this style). Great post; love your blog!!

    Reply
    1. Apathy Ends Post author

      Thanks Jeff – appreciate the read and comment

      I am one of the few that haven’t read Dave Ramsey’s work – but I hear/see it come up consistently. I like that philosophy though!

      Reply
  11. Dividends Down Under

    Hey AE,

    We live by a similar method and it really works for us too. Of course your spend isn’t 100% of your income, but it really forces you to evaluate everything you do spend (frugality) and makes your money stretch 🙂

    Tristan

    Reply
    1. Apathy Ends Post author

      Absolutely Tristan – Hiding money up front make it a lot easier to cut spending, the money just simply isnt there

      Reply
  12. S
    Sarah @ Couple of Sense

    I’m on the fence on if we do this or not. For some reason I’m having a hard time defining it for myself. We practice zero dollar budgeting and all but $5 a month has a purpose in our monthly budget. Aside from aggressively paying off the mortgage and retirement savings we have a lot of savings goals, for things like a new used car. So we don’t invest that money but we aren’t spending it right now either. So I think that we don’t live paycheque to paycheque (Canadian spelling) but I applaud your efforts. It’s an aggressive plan towards a saving goal and it is a way to limit your lifestyle inflation if you have no extra money to spend since you take it away from yourself right away.

    Reply
    1. Apathy Ends Post author

      based on how you describe your situation it sounds like you are pretty close to this plan, at some point cars need to be replaced and its not like you are frivolously spending the money on something you dont need.

      Appreciate your reading and commenting!

      Reply
  13. Thias @It Pays Dividends

    We do something very similar. Our 401k, Roth IRA, HSA, and taxable savings transfers are non-negotiable each month. We shoot for a set amount of spending. If our actual expenses come in below, then we save a little bit more than month. Nice post!

    Reply

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