If you’ve checked out my portfolio or my goals, you may be a bit confused by this title. Clearly I’m not living in credit card debt, struggling to make payments each month, and I would be able to continue paying my bills for a year if I lost my job tomorrow (without having to raid retirement accounts).
So how am I even sort of living paycheck to paycheck? Because I’ve earmarked roughly 40% of my take home pay for savings, and every month, the day after pay day, that money disappears from my checking account and is automatically transferred into various savings vehicles. Beyond that, I sheepishly admit that I took on a car payment this year after my old car was totaled, and vowed to myself that I would significantly over-pay each month to get rid of the loan as quickly as possible. So I’ve also earmarked about 13% of my take home pay for the car payment, and I refuse to shrink that payment unless there’s a dire emergency. Rent and bills run around 20% of my take home pay, leaving about 27% for food, clothing, fuel costs, entertainment, gifts, charity, cat food, and any additional savings I can manage. The result is that I sometimes feel like I’m living paycheck to paycheck.
With 73% of my take home pay set aside for rent, bills, car payments, and savings, I’m forced to really think about every day-to-day purchase I make. If I spend more than 27% on these discretionary expenses, I either have to borrow money from my emergency fund, or make a smaller car payment that month, neither of which would make me very happy.
It really hit home for me last month. As many women can likely commiserate, it’s frigging hard to find a pair of jeans that fits really well. I’d been going for years with a closet full of ill-fitting jeans that rarely got updated because I hate shopping for jeans so very much. Finally my fiance convinced me that we were going to spend as much time as we needed going to a few stores and trying on every pair of jeans that might look good, and we were going to completely re-fill my closet with jeans that actually fit. I was cranky and complainy for most of the day, but finally when we went to JC Penney we hit the mother lode. I found a whopping six pairs of jeans that looked great on me, so I bought all of them and donated every single pair of jeans that was previously in my closet to Goodwill. I knew that with my aggressive savings and car payment, buying six pairs of jeans would require sacrifice for the rest of the month, and I still might not quite make it in under budget. As the month dragged on, I wasn’t very good at saying “no” when my theatre friends wanted to go out for drinks after weekend performances, and those discretionary purchases kept adding up. By the end of the month, I realized I failed. I was $50 over budget. I had to borrow $50 from my emergency fund to pay my credit card bill.
Let that sink in for a second. I had to borrow $50 from my emergency fund to pay my credit card bill. That’s something someone living paycheck to paycheck says, not a financially savvy saver with her sights set on financial independence. By automatically transferring a large portion of my paycheck into savings, and not allowing myself to ever fall short on my rent, bills and car over-payment plan, I’ve created an artificial paycheck to paycheck mentality for myself. Though I didn’t intend this when I set up my automatic savings, the end result is that because I never see the money, I sometimes forget that I’m saving at all. So when I use up my entire discretionary budget, it feels like I haven’t saved anything. It feels like I spent more than I earned.
This is the magic of automated savings. You don’t see the money, so you forget you have it. You learn to live on less, and when you push the limits of that budget, you motivate yourself to save even more money. If you haven’t automated your savings yet, do it now!