Living paycheck-to-paycheck is an unpleasant financial experience. Not only does it mean needing to spend everything you have to make ends meet, it may also create an ongoing feeling of despair.
You might even have to get into debt to pay your bills. And if you aren’t careful with debt usage, it may become a habit that eventually grows large enough to take you under.
Living paycheck-to-paycheck can result from either self-inflicted wounds, such as buying too many things you don’t need, or unfortunate circumstances like job loss or unexpected medical expenses.
Regardless of the cause, it’s crucial to acknowledge our situation and take control of what we can. Although it might feel embarrassing or even shameful to be in a difficult financial place, embrace these feelings and use them as motivation to move forward.
My First Experience Living Paycheck-To-Paycheck
Once I graduated from college in 1999, I no longer had the support of The Bank Of Mom & Dad.
Securing a job in Manhattan for $40,000 a year, even back then, didn’t stretch very far. To cut costs, I shared a studio apartment with my high school friend and took advantage of the free cafeteria food if I worked after 7 pm. The studio cost $1,800 a month total, plus utilities.
Faced with the challenges of work, I made a strategic decision to max out my 401(k), which had an employee contribution limit of $10,500 at the time. It was my main hope for eventual financial freedom.
With $29,500 in gross income remaining, money was consistently tight that first year. However, I maintained hope that my career would progress, bringing in more income. By the second year, my base salary increased to $55,000, bringing much-needed relief.
Below was my budget in 1999-2000 while living at 45 Wall Street, New York, New York. At the time, it was all work and maximum frugality in order to one day be free. This was when my desire to FIRE by 40 began.
My Second Experience Living Paycheck-To-Paycheck
The second time I found myself living paycheck-to-paycheck was in 2012, following my departure from my finance job. After a ~80% decline in total income, I had to carefully manage my budget, relying on almost all my passive income for basic living expenses.
After a year-and-a-half of early retirement, I opted to undertake some consulting work at Empower (previously Personal Capital) from 2013-2015. This consulting income provided a welcomed buffer, offering respite from the paycheck-to-paycheck lifestyle.
In hindsight, I may have retired about five years too soon, but my severance package acted as the impetus for taking a leap of faith. It was then or never! Had early retirement not worked out, I would have gone back to work by age 37.
As long as my passive income covered my living expenses, I invested nearly all of my part-time consulting earnings in stocks and a fixer-upper in 2014. Thanks to a robust recovery in both the stock and real estate markets, I managed to break free from the paycheck-to-paycheck lifestyle within a couple of years.
Latest Experience Living Paycheck-To-Paycheck
Today, I find myself back in the paycheck-to-paycheck cycle because I sacrificed a significant portion of my passive income to purchase a forever home in October 2023. This self-inflicted decision has left me with over a $100,000 annual deficit between my passive income and desired household expenses. Any large expense or surprise capital call will compromise my family given our lack of liquidity.
In response, my wife and I have committed to adopting a more frugal lifestyle for the next 24 months to rebuild our savings. The journey has been challenging, with several unexpected expenses. Despite these financial setbacks, I’m confident we will persevere.
My ultimate goal is to generate an additional $150,000 in gross passive income by 2029. While the goal may seem daunting, I remain optimistic. A continued bull market, a fortuitous exit from a venture capital investment, new income opportunities, and a shift towards higher-yielding assets could make this goal attainable. Then again, another recession could make this goal impossible.
Actions To Take To Stop Living Paycheck-To-Paycheck
To give ourselves a greater than 65% chance of reaching this capital accumulation target in five years, we’ve embraced the paycheck-to-paycheck lifestyle. This entails meticulous budgeting, expense reduction, and boosting income.
I’ve lived this life twice before, and I will do so again until the financial strain stops. If you want to achieve FIRE, then adopting this type of financial focus will help you get there quicker.
The following outlines our plan to break free from a financial whirlpool we find ourselves in and eventually…
Read More: Embrace Living Paycheck-To-Paycheck To One Day Be Free