Everyone likes the idea of being rich someday, but if you’re stuck living paycheck to paycheck, that may seem like an impossible dream. Don’t let your pessimism get the best of you; even if you’re barely making ends meet now, there’s no reason you can’t establish a brighter financial future for yourself.
The Cash Flow Problems of Living Paycheck to Paycheck
The biggest problem of living paycheck to paycheck, at least in terms of building wealth over time, is not having positive cash flow. If you spend every cent of your paycheck on everyday expenses, you won’t have anything left over to save or invest. That’s why your first priority is going to be breaking out of the cycle. From there, you’ll be in a much better position to achieve your long-term financial goals.
Phase 1: Breaking Out of the Cycle
How do you break out of the cycle?
- Consider moving. The cost of living varies dramatically by location. If you’re making the same amount of money, but your expenses are reduced by 20 or even 30 percent, you’re going to be in a much better financial position. You can also significantly lower your housing expenses by relocating to a smaller, cheaper place. Moving itself can be stressful and expensive, but it’s often worth the effort.
- Cut unnecessary expenses. You definitely have at least some unnecessary expenses that you can cut. Can you make coffee at home instead of going out? Do you really need all those streaming services? If you look carefully, you could find hundreds to thousands of dollars of annual expenses that can be eliminated.
- Pick up a side gig. If you’re not making enough at your current job, consider picking up a side gig. There are almost unlimited options to choose from, such as creating artwork, walking dogs, or live streaming. If you’re lucky, this could even turn into a full-time career.
- Start training. Invest in your future by improving your training and education. Prepare yourself for a more valuable career this way.
Phase 2: Accumulating Initial Capital
Phase two is accumulating your initial capital, which you’ll use to save and invest.
- Pay down your debts. Debts can be crippling, so they should be your top priority. Pay them down as quickly as you can – and prioritize high-interest debt.
- Set savings goals. How much can you save every month? Set an ambitious goal and try to reach it each month.
- Accumulate an emergency fund. Emergency funds protect you against unplanned expenses and sudden emergencies so you don’t have to accrue debt or compromise your saving plan to cover them.
Phase 3: Making Investments
Unfortunately, stashing money in a basic bank account isn’t going to help you grow your wealth. Instead, you need to invest, and you have several options for how to do it.
- Rental property. One option is to purchase rental property, which should generate more in rental income than you’re paying in monthly costs. Hiring a property management company can make this much easier; they’ll help you select the right properties and manage those properties efficiently.
- Stocks and ETFs. Stocks have potential for high growth, even though they are slightly riskier than some other investments. That’s why many investors choose to invest in ETFs, which allow you to invest in many different stocks simultaneously and indirectly.
- Bonds. Bonds don’t generate as much of a return as real estate or stocks, at least historically, but they are highly stable and safe.
- Other investments. Other investments are also worth considering, such as precious metals, commodities, cryptocurrency, and even peer lending.
Phase 4: Ongoing Growth and Management
At this point, your job will be nurturing your investments so they continue to mature.
- Search for a more lucrative career. You should strive to increase your income consistently. If you’re no longer able to advance in your current career, you may need to start looking for a different career. Don’t allow yourself to stagnate.
- Stay cash flow positive. As you make more money, you’ll be tempted to spend more money, but it’s important to consistently live below your means so you can stay cash flow positive. Don’t allow lifestyle creep to jeopardize all the progress you’ve made.
- Carefully rebalance your portfolio. Over the years, your risk tolerance and your financial priorities are going to change. Your portfolio needs to change with them. Take the time to evaluate your portfolio and rebalance it on a regular basis. Most people gradually shift to a more conservative, less risky portfolio.
The path to building wealth from barely scraping by isn’t straightforward, but it is possible. Maintain a positive attitude and keep making iterative progress toward your goals; even if you don’t become rich, you’ll at least be in a better and more comfortable financial position.
