Monday, August 6, 2007

Not living paycheck to paycheck

When my wife and I married 2 years ago, we were literally living paycheck to paycheck. A paycheck would come in and we would pay the bills we had received, the minimums on the cards and loans, buy the essentials like food, splurge a little, and then try to save whatever was left over.

After we were married we decided to tackle our finances. We wanted to manage our personal finances, not just sit along for the ride.

One of the best feelings I got was when I realized we no longer lived paycheck to paycheck. We started saving off the front end of our paychecks instead of the back end, saving money for bills that did not arrive regularly (like insurance), saving for retirement, delegating a huge chunk of our savings rate to paying off debt after having established an emergency fund, stopped carrying balances on the credit cards, and only splurging after all those things (and food and bills) had been paid.

Now that we have money sitting in a bank in emergency fund and our bill savings, we have funds sitting there that we use to pay the bills. This is our "bill pay account", formerly what I called our "readjustment account" - still trying to come up with a good name for it. Now when we get a bill, we just pay it. When a big bill like insurance comes it, we just pay it. No sweat.

It's a great feeling, because we really feel like we're making progress.


Jim said...

I would love to get to the point of just living paycheck to paycheck. Lately my situation has been along the lines of living before the paycheck comes in. Life and money never seem to be on the same page. It is difficult to try to make everything balance out nicely when the income goes from being consistent to inconsistent forcing us to live on less. If the income changed but spending did not, the same amount of spending does not fit into the same amount of income.

We used to be able to make it on one income right out of college because our expenses were relatively low. My wife did not need to work during her internship because we had enough money and were able to live on it. I guess I'm not sure why so much changed within two years. One thing I am certain about though is once she is done with school and gets a bigger solid monthly income, we will be able to do things like pay off debt and save as long as our lifestyle does not change.

I like your idea of having a bill pay account where the money in there is earmarked for paying bills. I have never been not able to pay a bill, but the idea of setting money aside in order to do it is interesting. That would just take some extra management to figure out where all the money is sitting and what it is used for. Do you use Excel spreadsheets, Money or Quicken?

Beyond the Consumer said...

I use Excel. I tried both Quicken and Money, but it really didn't work for me. There were too many things that I wanted to do with our finances that those programs didn't seem to offer. Or at least I never took the time to learn how to properly use them.

With Excel, it was easier to build up my financial tracking over time and evolve it as our spending habits evolved. The bill pay account came after a simple tracking and analysis of where our money was going. We found ourselves faced with huge irregular bills and struggling to find cash to pay them, and that system just wasn't working.

The most interesting thing about the whole process was how much money we "found". When we realized how much dining out was costing us, we started buying more groceries and saved hundreds a month. We also looked at our grocery list and saw how much "processed" foods were costing us, started buying everything fresh and selecting recipes that used rice and pasta (cheap and great fillers for meals) - thus we cook a lot of Asian and middle eastern dishes. We stopped buying brand names, started making our own pasta sauces/tartar/dips/snacks, etc.

My strategy for getting our spending under control was to take everything (bills, savings, bill readjustments, debt repayments) off the front end of our paychecks. Anything left over we could spend. If we had nothing left over, we just sat around and did some gardening or cleaned the house or just sat and talked. Fortunately we still eat well because we kept our kitchen stocked to make good healthy meals.

We're still paying off debt, but we're finally getting control of our finances. It didn't happen overnight - it took me a year and a half to get my financial Excel workbook where it is now. It took a year to change our spending habits to the point where we now have no credit card debt and pay over 25% of our income into debt repayments while still saving 15% for retirement.

Wallowgirl said...

I think having a seperate "bill pay account" is great idea. I am slowly trying to do the same thing as well. Right now I am using the old fashioned "envelope trick" to manage certain things like food or gas. Very archaic, I know, but it helps us visually.
I'm glad you're making progress.