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The golden standard for being financially sound is having a budget.
For some reason this is something many people don’t do–and it’s why they live paycheck-to-paycheck.
As for me, I didn’t know how to handle my money until I had a “real job.” I worried about how I’d be able to afford things like a house, a car, possible future children (which are no longer an option), and pets.
While in college I used a tool called Mint. It let me connect my bank accounts to categorize transactions, but I found it clunky and unable to reliably tell me where my money was going or if I had enough money to cover my expenses for the next month.
After too long using Mint I switched to YNAB and have been using their digital envelope system for over a year now [since September 2016].
For many people, finances are scary and difficult to talk about.
It could stem from a childhood during which money was never mentioned, but the effects of lack of money were acutely felt.
It could be that you lived a nice life as a kid and subsequently thought money grew on trees.
It’s a little embarrassing but that’s how I grew up. My parents are well-off and I never wanted for anything. My dad would hand my sister and I cash back from the store whenever we asked. He’d take us out to get food or coffee because he felt like it, ignoring any noises our mom made about it.
My parents paid for my college education, too, so I never had to work during the school year.
I was twenty before I got my first summer job.
When I look back on my life thus far, with less than five years of work experience, I sometimes cringe to realize that for most of that I have no idea where my money really went.
When the panic began to materialize I knew I had to figure out this budgeting thing.
The trick to getting out of the paycheck-to-paycheck cycle is a combination of changing your mindset about money from scarcity to abundance, and consciously tracking your spending so you know exactly where your money is going–and consequently where you need to cut back.
I worked up to the point that I’m always funded two months ahead.
That means that by the end of July, August and September are already fully prepared for the expenses in those months, and at the end of October, I’m prepared for November and December.
That, by definition, is not living paycheck-to-paycheck.
That’s a budgeted lifestyle.
Doing it this way takes away so much of the mental stress and worry about being able to afford things.
Want to take a trip to Disneyland? Check your vacation category.
Want to replace your old TV with a nice, new 4K flatscreen? Hope your new electronics category is ready for it!
Have to pay a traffic ticket? Ramit Sethi (I Will Teach You To Be Rich) calls this his “stupidity fund” and actively prepares for things like this.
The beauty is going into financial decisions already knowing what you can afford instead of guessing and hoping that the card isn’t declined.
I know many, many people are in crushing debt, and breaking the paycheck-to-paycheck cycle feels impossible. There are several resources I’d like to recommend for you since I can’t speak from personal experience with debt.
These people all have a lot to say about dealing with debt and budgeting. For example, Dave Ramsey has a very popular method of paying down debt called the “snowball” method. With it, you start by paying off your smallest debt and move up and up to build the momentum of success until all your debts are wiped out.
That method is really good for psychological reasons, even though it may cost more over the life of your debts because of interest.
But it works!
Ramit Sethi teaches what he calls “The Rich Life” and it doesn’t mean what you might think! It’s all about building wealth and automating your finances so you don’t have to worry about any of it.
One huge part of budgeting that everyone should do regardless of how you budget is accruing an emergency fund.
By definition, this is money that’s only to be used in real emergencies, like these:
- You lost your job
- Your car(s) broke down (including simultaneously)
- Insurance isn’t covering a medical procedure or expense
- Your dog ate a huge box of chocolate and needs emergency veterinary attention
- A wildfire is approaching your home and you need to evacuate (and pay for it)
Emergencies are not these:
- Your phone screen cracked and now looks bad, but didn’t lose any functionality
- There’s a tiny bit of cosmetic damage on your car that you’d like to get touched up
- A friend from college is throwing a destination wedding and invited you but you forgot to save up for your plane ticket and rental car
- You spent more than you thought you would on Amazon Prime Day, so you dipped into your E-funds to cover it
- There’s a sale at Pottery Barn and you NEED to get a new side table for your couch
At first, it’ll take a lot of discipline to avoid using your savings for the non-emergencies, despite how urgent and “emergent” they feel.
My final advice is this: pick a budgeting method, a budgeting tool, and stick with it for at least three months. Watch your nightmares about money disappear.