Earlier this week I talked about some disadvantages of living from check to check that I’d realized over the last ten years of never being ahead.  I mentioned that I’d share with everyone exactly how I managed to stop living only two weeks at a time…every pay-period…with little to no progress for the last decade.

This isn’t rocket science folks.  It’s almost as simple as the "spend less than you earn" phrase.  The hardest part is actually getting enough ahead of yourself and then staying there.  I know, easier said than done right?  We’ll let’s break down the exact steps I took and see where we end up.  (I rounded numbers occasionally to make things simple for the example, but I did do these steps.)

Know Your Income and Expenses

Ok, before we can solve any problem we have to know exactly what the problem is.  We need to know all of the problem though, not just the gist of it.  We need to define each and every piece of it so that we can make sure we have a solution that works with each and every piece of it.

So let’s define our problem…how about we start with something we’ve all probably heard before: 

"I never seem to have enough money when it’s time to pay bills.  Every time we get our paycheck, it all disappears right away without having anything left.  Sometimes it’s not even enough to pay what’s due!"

I see that statement, and I see a couple things pop out.   Bills and paycheck…i.e. expenses and income.  What are they?  Do you know them all off the top of your head?  Do they change from month to month?  If not, get a budget going.  If you have a budget already and you don’t know this…perhaps you should look at it more.

So now that we have some data, let’s change our problem into something more quantifiable using them:

"I make $5000 a month, and my expenses are roughly $4500 a month.  I should have another $500 afterward, but I don’t!"

This is typical of people that live paycheck to paycheck.  That extra $500 "disappears" during the pay-period you got it, and you don’t know where it went.  Even worse, sometimes you don’t have enough to pay the $2500 in expenses when you need to.

One thing we need to do is to make sure the problem is addressed.  However, there’s a number of things we need to do in order to accomplish that.

Balance Your Budget

Photo by markdrasutis

This may sound like a huge amount of work, but too bad.  It’s GOTTA get done.  This can be simple, or it can be hard…but basically you need to just make sure your expenses aren’t more than your income.  You have to be honest with yourself.  The only person you screw over if this step isn’t done truthfully is yourself, well and maybe your family and possibly your friends…  Ok, geez, you HAVE TO DO THIS.  If anything, at least know ballpark figures.

$5000 is more than $4500.   Check.

Verified that $4500 is REALLY what I will spend in a month.  Check.

See my budget page for more details.  I rounded off here for simplicity.

Apply a Budget Buffer

Basically what we need to do next, now that we know we’ll be spending less than we make, is to place a budget buffer in our account.  This is crucial to allowing you to stay ahead of your bills enough to NOT fall back to the paycheck to paycheck routine.  This is probably the most difficult part of the entire plan.  Basically, you need to have an amount in your account that can ALWAYS cover the next month’s expenses not including the last paycheck in the month.  In other words, you’re going to live on last month’s income.

Will it be easy to save up enough money in your account to do this?  Probably not, but it’s definitely worth having it once you manage to do it. 

I used money from this year’s tax refund to finally put this in place for us.  My budget buffer is about $2000. 

When I finally calculated this, I made that the amount of my emergency fund as well.

The budget buffer is NOT the same as the emergency fund!  Do not get these confused, as you may need to dip into your emergency fund while your account balance is low during the month!

Recalculate and Repeat

Things change every month.  Trust me…I know.  A family of 8 has its fair share of chaos.  So make sure to account for upcoming changes in your income or expenses.  Like I said, the hard part was GETTING the budget buffer in place.  Now all you have to do is make sure it stays there by not spending it.  Each month is an entirely new effort.  It’s just like a credit card, you can spend that amount SOOO fast, but putting it back can take months!

Photo by jovike

So recalculate your income and expenses each month and make sure your budget buffer is lined up with your paydays before next month.

This repetitive cycle is what will allow you to stop living paycheck to paycheck.  So long as you always know your income and expenses, and you know the minimum amount to maintain in your account during the month, then you should never have a problem being able to pay your regular bills.

Now if some kind of emergency comes up…well that’s what the emergency fund is for!  Obviously you gotta do what you gotta do sometimes, but I can’t emphasize enough how much NOT living paycheck to paycheck is changing our financial situation and confidence.

• NO MORE LATE BILLS!
• NO MORE LATE FEES!
• LESS STRESS!
• CONFIDENCE!
• MOTIVATION!

So, that’s basically what I did to break my never-ending cycle of late bills.  Granted, we had to wait until getting our tax refund to finally get it started.  But here we are 3 pay-periods later and things are still right on track!  It was so worth it to put a system in place that we could really follow.  (Technically, my emergency fund is acting as my budget buffer temporarily until we fully fund both balances, but we’ll have that done by next month.)

So if you’ve not broken the mold, what are you waiting for?  What other methods have you used to get out of the check to check rut?  I’d love to hear how you’re dealing with this type of situation, or what other struggles you’re having trying to get through it.