Our journey to Financial Independence

Tag: Debt-Free

person signing loan agreement for purchase of apartment

5 Ways To Stop Living Paycheck to Paycheck

No matter how much they earn, people end up living paycheck to paycheck. Whether you are a professional athlete or a student with a side job you might be in this situation. But stay positive, because you are struggling today doesn’t mean there is no hope.

person signing loan agreement for purchase of apartment
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Although, many will have managed to save some money during the pandemic. It’s often down to having fewer opportunities to spend no more clubs, restaurants, or shops. The likelihood of us going on a spending spree diminished greatly.

“Act your Wage”

DAve Ramsey

It would be naive to think that once the opportunities return, spending will remain in place. So why not create healthy habits now and protect ourselves from temptation and expenditure?

The vicious circle of living paycheck to paycheck

32%, you read that right 32% of people, surveyed in 2020, were in financial distress. Whether they earned $40,000 or over 200,000 the result was the same 30% or more ran out of money before payday. Unsurprisingly, below that threshold people ran out closer to 40%.

Whether it’s taking on debt early in life or succumbing to Lifestyle inflation. The continuous chase for more leaves many behind grappling at straws. When your checking account approaches the inevitable overdraft – credit cards become a saving grace. 

Summers might be easier but when winter hits and the energy bill goes up things can change drastically. That new iPhone or brand new car might seem like only a few hundred per month now… In the long run, monthly payments and debts add up.

“If you can’t pay for it twice cash don’t buy it”

Peter Saddington

Lifestyle inflation is the culprit when wages go up, we tend to want to live “our best life”. Worse than that we increase our expenditures with the hope of a windfall. That is nothing short of lunacy. In an episode of the Fast Track Podcast, Peter Saddington shares the spending habits that brought him to 1milion net worth at 26!

Of course, it’s easier said than done once you have reached Financial Independence. Yet you need a backup plan and solutions. Time to dive in:

How to escape living paycheck to paycheck

You aren’t as smart as you think

I know it hurts to hear… But studies show that 71% of people have an inflated perception of their Financial Literacy. Only 34% of people were able to answer basic Financial Literacy questions.

That percentage rings a bell, doesn’t it? There might be no correlation but it seems like an unlikely coincidence. If you want to test your knowledge follow this link.

cutout paper illustration of hand with coin above jar
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By accepting our true knowledge we make a giant step towards saving more money. Lower financial knowledge leads to riskier investments. Not only does it mean you are taking more risk you lose track of your portfolio. 

Take the time to educate yourself and learn there are many resources out there to get yourself started.

BUDGET BUDGET BUDGET

If you want to get out of this vicious circle… you need to know where your paycheck is going. Track all your expenses and money sinks. Don’t be ashamed of where the money is going but try and understand why you are spending it. 

A great rule of thumb as a beginner is to follow the 50-30-20 rule. No more than 50% of your expenses go towards needs, 30% towards wants, and 20% towards savings. 

The 50/30/20 rule to avoid living paycheck to paycheck

By reverse engineering a budget you can make it fit your lifestyle. The biggest problem with budgeting and following plans is the same as with fad diets. They don’t fit you or your lifestyle. 

Build your budget from the ground up to protect yourself from financial trauma. Understanding why you are saving money and where it’s going will also give you a clear purpose. It’s also likely to help you stick to your habits! 

Debt First

Paying back your overdue debt is the highest guaranteed investment you can make. Credit Card debt is typically 15% and higher interest. If you stick to minimal payments and max out your credit line… You will quickly be in over your head.

concept of waiting for cash credited to bank card
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At a 20% interest rate, your debt will have doubled within 4 years. The compounding effect isn’t always your ally if you aren’t ready for it. Paying back debt should be your number 1 priority.

Debt will trap you into the vicious circle of living paycheck to paycheck.

Sneaky Influencers

man in white crew neck top raising hi left hand to meet the like button. He lives paycheck to paycheck as he is trapped
Photo by Oladimeji Ajegbile on Pexels.com

Our generation deals with a new kind of financial pressure: social media. Seeing people living their amazing lives on Instagram or quitting college to hustle on Twitter… It’s enough to drive anyone incoherent. 

Schwab’s “Modern Wealth Survey” showed FOMO is the leading cause for spending. 35% of people surveyed spend more than they can afford to join experiences. 34% will make unexpected purchases based on Social Media.

This is where lifestyle inflation often hits the hardest. Now that your salary has increased you need to show it through your lifestyle. You make $50k a year, so you definitely deserve a brand new BMW worth 40k. It doesn’t matter that you will be making a $600 payment monthly. 

The other trap is moving to a higher cost of living area to fit with your new lifestyle. The biggest fixed cost often is rent. Once you’ve signed a contract for 2 years you are stuck. No matter what happens you will be shelling out “the appearance cost” of your apartment. 

house luxury villa swimming pool paycheck to paycheck
Photo by Chris Goodwin on Pexels.com

By “improving” your lifestyle and de facto increasing your expenses you negate the effect of a raise. By relocating to a cheaper neighborhood, downsizing your flat, or finding a flatmate you will effectively decrease costs.  

Living in a mansion isn’t worth it if you end up bankrupt. If you want to learn more about how to avoid lifestyle inflation and other financial sins read my article “7 deadly Personal Finance Sins”.

Prepare for the worst

You’ve finally gotten out of debt and cut out most of your superfluous expenses! Congratulations. Unfortunately, you aren’t quite ready to invest yet. I know this feels like it’s taking forever but you are getting there!

Before, investing you need a security net. It will protect you from falling back into old habits and lose all the progress you have made. This magic tool is an Emergency Fund. Typically, an emergency fund is anywhere between 3 and 6 months of expenses saved. Having it at hand guarantees that you are ready for let’s say… a global pandemic?

Emergency Fund Piggy Bank

This is not a future “enjoyment” fund it’s the last resort. Having an emergency fund allows you to keep your head cool when a medical emergency arises or you lose your job. Additionally, you will feel at ease when looking at your bank statements. 

Breaking the Vicious Circle!

Now that you have the tools, how are you going to use them? Learning about Personal Finance and how to manage my income has changed my life. I’ve been on this journey for a little over a year now and would love to see you join me!

There is always more to be done and to be learnt. Living paycheck to paycheck isn’t a necessity. What was your first step towards living a Financial Stress-free life?

fireworks on 2021

5 Easy Personal Finance New Year’s Resolutions for 2021

New Year’s Resolutions or Financial Goals

Every year the same dance begins. We look back onto the last 365 days and realize we haven’t turned our life around. What’s the next logical step you might ask?

It’s easy we engage in the yearly ritual of New Year’s Resolutions. 2021 is a blank slate that we are determined to transform into a new chapter. From new diets, learning a new language, or more exercise everything will change. Instead of seeking a gradual change, we decide to make drastic changes.

Surprise, surprise…

We never stick to them. How many times have I told myself: “Next year I will exercise every day” more than I would care to admit. Unfortunately, I cannot say I’ve stuck to it so far.

So why not try a new type of New Year’s Resolutions? Let’s set financial goals and build the base of new healthy habits. Whether you decide to try out all of my tips or only to set 1 goal is up to you. Remember small changes are always preferable to no changes.

1. Build an Emergency Fund

If you don’t have one yet this should be at the top of your list. If 2020 has taught me anything it’s that life is highly unpredictable. Building an emergency fund is a great way to cover your back. 

You are ready to face any curveball directed at you. Take a look at your essential monthly outgoings from food, rent, and energy. Then keep in a high-yield saving account the equivalent of 3 to 6 months of these expenses.

Learn more about building your emergency fund for 2021 with my article “How To Build An Emergency Fund”.

2. Invest in being debt-free

Consumer debt is a plague in today’s society. The average Personal Debt in the US was $16,529 in 2018. You might think if everyone has it why do I need to pay it back? Isn’t it just part of life? I’ll make more money by continuously investing. 

If you are an Index Fund Investor and invest in an S&P 500 tracking fund such as VTI or VUSA. You can expect an annual return of around 7% although it could very well fall. On the other hand, Credit Cards charge an APR of 16+%. 

When you invest you are hoping for a return nothing is guaranteed. All you have to do to get an instant return on investment of 15+% is repay your debt. It’s the first step towards Financial Independence.

If you can’t afford to pay the balance in full, work towards paying more than the minimum deposit. Future you will thank you!

grow your investments graphs going up

3. Plant the first seeds

2021 is the year to invest your first $1. It might sound scary, risky, or even pointless to invest so little. Your mind is more at ease with the cash in a savings account. There is 1 simple problem with that…

High-yield saving accounts earn around 0.6% at most in 2020. Whereas inflation is on average at 1.2% in the US. You effectively lose 60 cents by 100 dollars you keep in the bank. 

You can start investing easily today with Vanguard for example that offers a wide array of index funds. If you were to invest $1 per day into an S&P500 index fund you would have 16,949. The power of compounding interest is mind-boggling.

If you want to learn more about investing with Vanguard and Index Fund investing discover my article “How To Start Investing With Vanguard”. If you want a no-fee and easily accessible trading, I use “Trading 212”. Give it a try with as little as $1 and if you use my link you will get a free share valued up to $100.

Change your life  by getting a headstart on your New Year’s Resolutions by starting today.

4. Learn Something New

If you are like me you need to know what you are getting into. It might be the Swiss in me but I like planning ahead. On my side, I use 2 tools books and financial podcasts. My favorite is adding a book to my library as I can always come back to it and grow my knowledge. 

If I had to read 1 book on the subject it would be “Your Money or Your Life” by Vicki Robin. If you are one of my regular readers you probably can’t stand me talking about this book anymore. But it truly changed the way I view money and my relationship to finances. I won’t spoil any more of it but it will change your life.

As for podcasts, there are thousands out there, I was lucky enough to be on an episode of “The Art of Money Saving” that you can find here. Otherwise, I strongly recommend fasttrack.life as Yasi Zhang regularly receives high-profile guests that breakdown the essentials of Personal Finance.

a desk with increasing returns

5. Just Talk

This New Year’s Resolution is simultaneously the easiest and hardest. The best way to grow your wealth and hopefully achieve financial independence is by talking about it. 

That’s it?

Well no… but it’s a great start. Sharing your experiences and asking experts about their’s will lead to a higher understanding. You liberate yourself of stigma and make financial decisions more rational. Yet one of my favorite quotes comes to mind:

“Money is the last taboo. People will talk about their sex lives before they discuss their finances.” Marvin H. McIntyre

Money is kept in a sacrosanct position. Society and big firms will have you believe that it’s a private matter. Yet, knowledge is power. So start talking! 

What will yours be?

Now it’s time to decide what will you do? Don’t pick too many choose 1 and get started. It doesn’t need to be suggested here. I personally have the goal to have £10,000 invested by the end of 2021.

To achieve it I will need to increase my monthly contributions as soon as I get a raise or am able to monetize Cent by Cent. I also aim to make my blog a secondary source of income for 2021 and further.

What will you be doing to better your financial future?

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