You would think that with all of the economic growth we’ve seen over the last fifty years that the average person’s bank balance would be looking pretty healthy. While households haven’t been getting richer, the average person’s job pays more per hour than at any point in history. There’s been an explosion of wealth and enormous fall in the price of the goods, like food, fuel, and entertainment.
But while there’s been a lot of progress in the world “out there,” it’s less of a rosy story when it comes to our individual bank accounts. A lot of people are living from paycheck to paycheck and find themselves running out of money before the end of the month. It’s a disaster. How can it happen?
That’s the question that we’re going to take a look at here. In this article, you’ll find out why you always seem to need to make some extra money fast with a few days to go to your next paycheck. It’s not rocket science, but it’s also not particularly intuitive either.
You’re Not Obeying The 30 Percent Rule
The 30 percent rule, or the 25 percent rule, is the rule that no more than 30 percent of your pre-tax income should go on paying rent or the mortgage. If you’re paying more than this, then there’s a good chance that merely paying to live is eating into your other expenses and making it hard to stay on budget.
While 30 percent might not sound like a large chunk of your income, it is. The remaining seventy percent has to pay for your transport, holidays, entertainment and socializing, not to mention all your taxes. The actual amount that you end up with can be tiny make just day-to-day living a challenge.
So what’s the solution? While it’s not ideal, it’s something worth spending less on accommodation and having more money left over for other things. Not all properties are unaffordable. Some, in fact, are surprisingly inexpensive and can slash the amount that you pay for a roof over your head, including taxes and other fees.
You’re Not Obeying The 10 Percent Rule
Here’s another rule that you might not be paying as much attention to as you should. The 10 percent rule is that you should dedicate 10 percent of your income to savings. While ten percent might not sound like a lot, savings accumulate interest over time, rapidly compounding the amount of money that you have in your account the longer you leave it.
The doubling time of your money is less than you think. Just taking historical averages, you only need to leave your money in the stock market for about nine years for it to grow by 100 percent (if you track the market). In other words, that $1,000 you’ve saved up today could be worth $2,000 in the future, so long as you put it in the right place.
You Don’t Have An Emergency Fund
What’s surprising about the modern world is that the majority of people don’t have an emergency fund. More than half of people can’t come up with $500 in 24 hours, meaning that many have to turn to lenders for life’s essentials, like towing a broken-down car.
Building an emergency fund isn’t easy, but the people who do it often say that the lifestyle changes are worth it in the end. An emergency fund gives you security so that you can continue to pay for the things you need, even at the end of the month.
If you’re already maxed out, then the idea of creating an emergency fund could seem a little far-fetched. But if you follow the 30 percent and 10 percent rules outlined above, it usually just follows naturally. When you spend less on your accommodation and regularly save, you build up an emergency store of wealth over time that you’re able to dip into whenever you need it.
Emergency funds are amazing things. They give you peace of mind and let you get on with your life without feeling like you’re on a financial knife-edge the whole time.
You’re Not Budgeting
While budgeting in the past could be something of a challenge, with today’s money management apps, it’s easier than ever. Budgeting shows you how your cash position will evolve over the month and where you’re spending money. One of the cool things about today’s money management apps is that they show you how you’re spending your money, categorizing it into things like “entertainment” and “computer equipment.” You quickly learn where the money is going and what you need to change to stop it from leaving you penniless.
Here’s an outline of what to do to make a basic budget:
- Slice your earnings into monthly payments and total up the amount paid for the month. Include any additional regular income, like a side hustle or gig job.
- Next, total up all of the costs that you have to pay out. These could include things like taxes, rent, utility bills, license payments, and loan repayments. Once you have an idea of the costs that you have to pay versus your income, you can see whether you’re in a precarious financial position or not. Ideally, you’ll want these must-pay expenses to come in under 60 percent of your total income. If they don’t, then you’re probably living too close to the wire.
- Finally, look at where you can trim down on your obligatory expenses. Could you pay off a loan faster to cut down on interest payments? Could you downsize and rent somewhere smaller until you can afford a more significant property? Will switching your utility providers help you lower your costs?
You Have An Income Issue
Not everyone who lives paycheck to paycheck does so because of their inability to stop themselves spending money on things they don’t need. For some people, it’s just a plain and simple matter of not making enough money.
How much money you make and your worth as a person aren’t as tightly related as our society sometimes implies. Wages can stagnate in an entire industry for all kinds of reasons that have nothing to do with the raw value of workers themselves.
Take manufacturing jobs, for instance. The rate of pay in this sector fell dramatically over the last forty years, but it wasn’t because workers became less valuable: part of the reason was competition from foreign labor, and part of it is automation. In other industries, pay can fall because of changes in tastes. Footballers wouldn’t get paid as much as they do today if people suddenly switched to watching lawn bowls.
Income issues are, fortunately, relatively easy to resolve in the modern economy. Besides applying for a promotion, there are a variety of things that you can do right now to boost the amount of money that you take home in a month.
The first place to look for extra money is freelance work. If you have a skill of any kind, whether it’s writing or video editing, there are numerous opportunities in the gig economy to make money on the side. What’s more, it’s highly flexible work, meaning that you can make money when it suits you. If you have an evening free after work, you can put it to use. Over time, you could add as much as 25 percent to your regular income, without having to change job or experience upheaval.
Another popular option is to take online courses and gain skills to work in specific growth industries, like computing, IT, photography, design, and marketing. By going into these sectors, you’re immediately taking advantage of the enormous demand and lack of supply, both of which push salaries higher.
You’re Not Paying Off Debts
Most governments around the world pay out enormous sums of money to lenders to service their debts. It means that there’s less money in the pot for things like welfare, health, education, and the military. The same is true of personal debt too: the more of it you have, the more interest you have to pay, and the less money you have for everything else.
Taking out a loan is relatively easy in today’s economy. Interest rates are low, and lenders are desperate to offload credit to customers. The cost, of course, is that most people rely on debt to buy stuff that they need right now, not to invest in businesses that’ll make money in the future. The overall effect is a decline in their wealth and a higher chance of living paycheck to paycheck.
Waiting for your paycheck is never fun. The days can drag on, and you can run into serious trouble, like not having the cash to put gas in the car or food on the table.
Ideally, you want to prevent this at all costs. Having money in the bank is often worth the peace of mind, even if it does mean cutting back on your lifestyle and making sacrifices. It helps you sleep if nothing else.