Living paycheck to paycheck – It’s all too common, and easy to do. Whether someone’s making $25,000 per year or $125,000 per year, a substantial portion of those earners are literally living paycheck to paycheck each month. While people often justify this self-perpetuating cycle by citing their ever-increasing real estate taxes, feeding a family of voracious eating teenagers or unplanned expenses, the reality is that no matter what they make, they’ll probably always live month to month because of the money habits they’ve established. By the last few days in the calendar month, the checkbook’s empty and the credit card is whipped out to cover any remaining expenses until the next paycheck comes in.
At one of my older jobs, there was a payment system glitch where the paychecks didn’t go out on time. They normally went out on Thursdays and something happened that prevented the normal Thursday distribution, so that by Friday, several employees were literally freaking out and screaming at their management that they were going to miss mortgage payments, credit card payments, utility bills and the like and they needed to be made whole – they wanted retribution! The paychecks ultimately arrived by Monday, but apparently, a simple 2 business day delay caused such consternation that employees lost all civility and self-control and practically rioted over it. Now, while I agree that people should be paid on time, and it was clearly our employer’s fault, on the rare occasion where a nominal couple day delay occurs, should it impede a family’s ability to survive?
Aside from the fact that if people are spending exactly (or more than) what they’re making each month, they’re not investing, there are true out of pocket costs that are incurred as a result of not having excess cash on hand for routine expenses, emergencies and even positive Net Present Value opportunities (see how to easily perform your own NPV for projects and purchases you’re considering) as I refer to them.
How Does it Actually Cost Me Money to Live Month to Month?
Well, aside from the obvious credit card expenses that are near impossible to pay off, here are just a few ways in which not having extra money actually costs you money:
1. Forgoing Tax-Advantaged Opportunities – An example is an employee-sponsored Flexible Spending Account. This is just one example, but basically, we all spend at least a few hundred dollars per year on medical and health related expenses, right? Most of us probably spend well over a thousand dollars per year when you consider all the eligible expenses like glasses, co-pays, prescriptions and the like (Full FSA expense list). Since the amount you set aside in your FSA is a tax deduction, if you’re in the 25% tax bracket and set aside your $100 per month to be diverted into your FSA, by next April, that’s a $300 return (plus you get your $1200 back). If you’re living month to month, you can’t afford to set aside extra cash and you’re forgoing that opportunity. While you lose the money if you don’t spend it, my article on FSAs outlined how to make sure that doesn’t happen.
Where else can you get a 25% Return on Investment?
2. Early Payment Discounts – As I outlined in this Real Estate Tax Early Payment article, by simply having some cash on hand, we save a few percent on our taxes each year. On a bill for several thousand dollars, that couple percentage points really add up. And annualized, it’s a great return again at 12% risk-free (you usually need to incur significant risk to even approach 10% in stocks). Since I know when the bill’s due each year, it’s not a surprise. It’s just having some discipline and a cash buffer to make it happen.
3. High ROI Home Improvements – As outlined here in this Low Cost, High ROI Energy Savings article, there are many simple, low-cost ways to generate very high Returns on Investment for simple upgrades to your house that either save on energy expenses or water bills. While it may only be a few hundred here and a few hundred there, with multiple projects enacted and the benefits spanning many years, you’re literally forgoing thousands of dollars over your lifetime by not investing in simply high ROI projects now.
4. Investing in Yourself – Let’s say you’re in a dead-end job and want to get into a new field, learn a trade to do something on the side, learn to how to design websites, blog, whatever – this often takes some time and money for proper training, books, or schooling in many cases. If you’re living month to month, you’re never going to go get that real-estate license or go get those extra classes to qualify you for a new type of career. You’ll essentially be remanded to the same cycle that you’re unhappy with now.
5. Having no cash on hand has other insidious downsides – One is the reliance on MAC machines and debit card overruns that are wrought with fees. Over time, the $2 MAC fees and $10 overdraft fees add up to hundreds of dollars that were needlessly disbursed due to lack of planning and discipline. I went to pick up a pizza the other night and while I usually pay with a credit card and enjoy cash back rewards (we ALWAYS pay our bill in full and never pay interest-key), the place didn’t accept credit cards but they conveniently had a MAC machine there (presumably, they get a cut of the proceeds?). I can only imagine how many people go in to pick up their food or sit down and eat only to realize they have to pay cash and they then tap the MAC.
There are numerous other downsides and missed opportunities, but these are just a few that come to mind. Aside from the mental anguish of always wondering how you’re going to cover an unplanned medical procedure for your child or how you’re going to attend your buddy’s wedding by not having a cash buffer, there are numerous benefits of having excess cash to put to work when opportunities arise.
What are your thoughts? Did I miss any key messages here?
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