Many a man thinks he is buying pleasure, when he’s really selling himself to it. ~ Benjamin Franklin
Forty percent of adults are unable to pay for an unexpected expense of $400 or more without selling something or borrowing money (Federal Reserve Board). Given this, it’s fair to say much of the financial advice you read about doesn’t apply to everyone. Telling someone who is working two minimum wage jobs while supporting a family with medical bills that he should accelerate mortgage payments or save 15 percent for retirement is likely to result in more than an eye roll.
This begs the question: If you’re living paycheck to paycheck, how do you break out of the cycle?
Here’s a possible answer to that question which was suggested to me in passing some years ago by someone whose name I’ve regrettably forgotten.
Step 1: Assess your essential expenses
Figure out what your fixed bare-bones mandatory monthly expenses are. By mandatory I mean only those expenses that you absolutely need to keep the lights on and a roof over your head, things like your utility bills and rent payment. Do not consider anything else in this calculation. For example, if you can get by without a car by, say, taking the bus don’t include your car payment in the sum.
Step 2: Set up a new no-fee bank account
Set up a bank account at a separate financial institution than you currently use that has no fees. By “no fees” I mean:
- No minimum balance requirement
- No monthly maintenance fee
- No inactivity fee
- And, ideally, no overdraft fees
Without offering it as a recommendation, while writing this blog, I checked out Simple and not only does it meet all of these requirements above but it also has a lot of extras like built-in budgeting tools and shared accounts. May need to check into this for me!
Step 3: Fund the new account
Continuing to pay your bills the usual way and with every extra dollar you get your hands on, patiently get the account balance in your new account to match your one month’s mandatory monthly expenses.
Step 4: Automate deposits and payments
Once your new account balance matches your mandatory monthly expenses start using it to pay for (mandatory monthly) expenses by:
- Automating payments out of your new account to pay bills.
- Directing deposits into your new account (from your paycheck) so that by the end of the month, after your bills have been paid, the balance again equates to the amount of your monthly mandatory expenses.
The beauty of this system is threefold.
First, because you will have paid for all of your mandatory expenses a month ahead you’re not carrying the financial stress that comes with worrying about where you’re going to get the money to keep the lights on and a roof over your head.
Second, because these funds are in a separate account with a different financial institution, you’ll be less likely to raid it when something comes up.
Finally, the money left in your original “working” account now serves as a visual indicator of how much you have left over for those other necessary (but perhaps not mandatory) and discretionary expenses.
On that note, considering the week I’m having, this is a great place to stop and ponder whether or not I should reclassify beer in my own budget. Before I leave though, in keeping with last week’s music recommendation, here (and on our Spotify playlist) are Cold War Kids with Bishop Briggs and their song “So Tied Up.” Hope you like it.
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Having said that, I am interested to hear from you. Good, bad, or otherwise, please feel free to drop me a line at email@example.com. I’m the only person who will read your email and, as time allows, I’ll do my best, at a minimum, to personally acknowledge receipt.