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:
- Money is automatically withdrawn/transferred into 401Ks, Emergency Funds, Roth IRAs and Brokerage accounts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
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.
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.
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:
- Emergency Planning
- 4 Money Mistakes to Avoid
- Savings Rate as a Budget
- Holding Ourselves Accountable: Credit Card Edition
- An Honest Conversation about Salary Expectations
Does anyone do something similar? What are your thoughts on living paycheck to paycheck willingly?
Some products that can help you:
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.