How To Stop Living Paycheck To Paycheck

What's up, guys? It's Graham here. So, let me tell you a quick story about what just happened. I was going about my day, a normal day, just like any other, and I decided to open up the internet to see what people were talking about, what was happening in the world.

By pure chance, when I opened up my computer and then took the initiative to go to www.seawindglobal.com and before payday, even those earning over a hundred thousand dollars. Once I read that, I was appalled. It was like a train wreck; you can't help but look at it. Well, you sit there and wonder to yourself, "Why haven't I already smashed the like button for the YouTube algorithm?"

After doing that, you shift your focus back to another alarming question: How can someone earning over $100,000 a year still be living paycheck to paycheck? It doesn't make any sense. After all, maybe this wasn't the entire picture, because the survey only gathered data from 2,700 US adults working in companies with over 500 employees. Maybe that has something to do with it. And if we just broadened our horizons, we might see a different outcome.

So, I went back to my number one trusted private investigator research tool, otherwise known as Google, and continued to dig up more information. That's where things got worse. Google took me to an even larger study conducted by CareerBuilder, which found that 78% of all US workers live paycheck to paycheck, and that encompasses everybody, not just people who work at companies that employ more than 500 people. That is absolutely unacceptable, if I have anything to do with it, which I don't really have anything to do with it.

But at the very least, we could discuss why so many people are living paycheck to paycheck, the research behind this, and if you ever find yourself in this predicament, what you can actually do about it, so that you're never going to have to live paycheck to paycheck ever again.

First, let's go over the article by CNBC, which goes over the data from employees who work at companies that hire more than 500 people. Obviously, the fact that one out of every three of these workers is living paycheck to paycheck is pretty staggering. Although once you've dived a little bit deeper into the data behind this, what I found, at least, was pretty shocking.

According to research, a higher percentage of people making over $200,000 a year run out of money before their next paycheck than the employees who are making between $40,000 and $55,000 a year. Not only that, but the percentage of people living paycheck to paycheck is almost consistent throughout every single income bracket, which really makes you think: how are there just as many people struggling at $160,000 a year as there are at $40,000 a year? Shouldn't the person making four times more money not have to worry about these things?

And shouldn't you be less likely to live paycheck to paycheck with the more money that you make? While speaking about being concerned about these problems, when surveyed, it was found that being concerned about your financial situation was also almost consistent throughout every income bracket, regardless of how much money they make.

Which just goes to show you that more money doesn't always lead to more problems. In fact, you have the exact same amount of problems. Our other survey doesn't make things look any better either, with three out of four workers saying that they're in debt.

But here's where things get interesting, because it seems like we're just going down this bottomless pit of emptiness and despair until I came across a question that started to make some sense. Now all of this data begins adding up. When asked, it was found that only 32% of the nearly 3,500 full-time workers who were surveyed use a budget.

In other words, if we flip this one around, two-thirds of people are not tracking where their money is going. Now, I'm not going to go so far as to suggest that creating a budget and tracking your spending is going to solve everyone's money concerns and problems, but given that 78% of American workers are living paycheck to paycheck and 68% of American workers don't have a budget, I think it's potentially safe to conclude that there's some level of correlation between the two and that a lack of a budget may coincide with the lack of leftover money every month.

But of course, we should try to dig a little bit deeper to figure out where this is coming from. To do that, I went back to my handy private investigator research tool of Google to pull up the Modern Wealth Survey by Charles Schwab. What they found was that in terms of spending, social media had the most negative influence on money management, with nearly 50% of Millennials saying they're more likely to spend money on experiences from something they saw on Instagram.

Almost half would spend more money to do things with their friends. Obviously, there's a bit of a cognitive dissonance going on here, because almost 60% of those people consider themselves savers, and 65% said that they were willing to sacrifice spending now in order to save money for the future.

Although, I suppose as much as people think they would like to cut back, a lot of them don't and won't. According to the very same study, the average American is spending almost $500 a month on non-essential spending. When asked what they would not give up on spending, regardless of their financial situation, 21% said they would not give up cable; 19% said that they'd continue going out to eat; 17% said they still travel; 13% said that they'd continue education; and 13% also said that they would continue buying gifts for people.

Lastly, 11% said that they'd continue spending money on alcohol, which makes you think: how many people living paycheck to paycheck have an income problem or instead maybe they actually have a spending problem? Especially if two-thirds of people do not track their spending or have a budget and the average American is spending five hundred dollars a month on non-essential items that can otherwise be saved and invested.

Well, in a way, it could certainly be both, but it's not helping that financial literacy skills have been declining over the last decade, with Millennials seeing the largest drop in education. Even though less than 35% of adults could answer basic money questions correctly, 71% of participants gave themselves a high score when assessing their money savvy in 2018.

So, there's obviously a big disconnect between how well people think they handle money and how well they actually handle money. This is, at its core, what's known as the Dunning-Kruger effect. These are the topics I love talking about because as much as we want to believe that personal finance is just looking at numbers and calculating them on a computer screen, I believe a big component of that is emotional and psychological.

So, going back to the reason why people think they're better at handling money than they actually are: here is why. The Dunning-Kruger effect finds that low performers are unable to recognize their own competence, which is the reason why they view themselves as better and more knowledgeable than others. Or, in other words, the very knowledge and skills that it takes to be good at a certain task are the very same qualities it takes to recognize that you are not so good at the task.

So, for a person who lacks that ability in the first place, not only are they going to be bad at the task at hand but also ignorant of their own badness. On the other side of the spectrum, though, those that are experts and are knowledgeable on a subject actually tend to underestimate their own abilities because they assume, in relation to themselves, that everyone else is just as equally knowledgeable as they are.

So, this definitely goes both ways, and all of us fall into this in one subject or another. But since personal finance is the topic of this video and personal finance is a skill that's been declining over the last decade, it is not surprising that financial literacy is down while at the same time our inability to recognize that is up.

So, without going into any more mumbo-jumbo on research and studies, here's what I think is going on. First, it's not surprising that just as many people are living paycheck to paycheck at $200,000 a year as there are at $50,000 a year. Even though I don't have any conclusive research to back this up, I believe that the type of person to overspend at $50,000 a year is just as likely to overspend at $200,000 a year, which is why overall spending increases in proportion to your income.

Even if they're barely scraping by at $200,000 a year, increasing their income to $500,000 is not going to solve the underlying issue. This could even be a derivative of Parkinson's Law, which states that our work expands to fill the time allotted for it, or in this case, our spending expands to fill the available income.

Once you're on that path, it's really difficult to get off. That's what she said—okay, stupid jokes aside. This is otherwise what's known as the Diderot Effect. It's a psychology that when you go and buy one nice item, it makes everything else look less nice in comparison.

So, that then causes you to upgrade everything else to be at the same level of niceness, and from that, we end up consuming way more than we originally anticipated. Like when you go and buy one piece of furniture and then you realize, "Wait a second, I need other nice furniture to go with this."

You continue doing that, and then eventually you need a new house to fit all of your nice furniture. So, the only way to break this cycle is to not give in to lifestyle inflation and make a very conscious effort not to spend any more money, regardless of how much you end up making.

The same thing also applies to worrying about money. I'll be the first to tell you, you will always have a similar level of money worry, no matter how much money you make. This is human nature and applies to so much more than just money. In fact, if you want another psychology lesson today, this is what's known as prevalence-induced concept change.

In a way, this suggests that as our problems go away, our mind creates and expands other, more minor problems to make them seem worse than they actually are. Therefore, our baseline level of what we worry about is always going to stay the exact same.

Like, say you worry about not making enough money, and then all of a sudden you make enough money. No, you're still going to worry the exact same, except your worry is going to shift from "I'm not making enough money" to "How can I not lose this money?" Or your mind could just create other problems for you to deal with, because the human brain can't cope with everything going too perfectly for too long.

The same phenomenon also works in reverse as well. Like, when bad things become a common occurrence, they just might not seem bad to you, and other things might seem more pressing.

However, this can pose a few problems. Number one: it might make us worry about things that are not really that bad. And second: it might normalize things that should be concerning but are not because they're so common. Like, not smashing the like button for the YouTube algorithm.

So, at least from that perspective, we can understand the psychology behind why people can't save money, why they spend as much money as they make, despite how much money they make, and why people are always going to worry about money until the end of time. But if you take a proactive approach to fixing this problem, it can make a difference.

Here's the thing: I don't want to dismiss the issues of wage inequality, wage stagnation, or other macroeconomic issues that we largely just don't have control over because those certainly do exist and do make an impact on how much money we save and spend.

However, at this point, I'm a firm believer in focusing on the things that we have full control over now and what we can actually do to take a positive step in the right direction today. Part of that comes with taking responsibility for our own actions and realizing that we could direct our finances in any way we choose.

All of that begins with budgeting. Since less than one-third of the workers surveyed had a budget and 78% of them are living paycheck to paycheck, I think making a budget should be the very first thing on the list for anyone who wants to break that cycle.

To me, that's even more important than finding a new job or making more money, because again, if the underlying problem isn't solved, it's likely to just continue. So, to make a budget, I would highly recommend free resources like mint.com and personalcapital.com, which will automatically track your income and expenses and then give you a detailed breakdown of where every last dollar is going.

By doing that, you can better identify the things you do not need to be spending money on and then create a budget to get back. If Americans are spending, on average, $500 a month on non-essential spending, then for sure there is room to cut back.

Even saving an extra $200 a month could add up to a substantial amount of money in the future if you just invest it. Doing this is all about seeing the delayed gratification for your efforts and realizing that every $100 a month that you save now can add up to a lot of money in the future.

Having that peace of mind with money in the bank can allow you to take more risks with your career that could end up making you more money, which could allow you to save the difference and therefore stop living paycheck to paycheck.

The second helps stave away lifestyle inflation. I highly recommend that you save your money first and then you spend whatever is left over, not the other way around. Too many people spend first, then maybe save whatever is left over, if anything.

But, nope! Once you create a budget and have a surplus of income, make sure to immediately save and invest that surplus of income before you ever have a chance to spend it. I also highly recommend waiting to buy anything that isn't already in your budget, even if you just wait 24 hours to buy it.

Because I found that most of the time when you want something and then you sleep on it overnight, you'll wake up the next morning and realize, "Hey, you know, I didn't really need it that badly. I don't want it as bad as I think I did." I'm just not going to buy it. A lot of spending really just comes down to fulfilling immediate desires, and when you take out the immediate in the equation, you'll realize that most things just aren't that important to you after you've had a chance to really think about it.

Third, realize that this applies to everybody. Even someone that's highly paid and well respected, like Mike Tyson, can blow through his entire fortune. So, it could happen to even the best of us, which is why it's important to always have a budget, stick with it, track your spending, and save the difference.

By the way, if you're already good with money, consider it almost like going to the gym. Just because you get in shape doesn't mean you can stop going to the gym, because it's going to the gym that got you in shape in the first place. Everyone could benefit by taking personal responsibility, focusing on what you can control, creating a budget, tracking your spending, and then saving the difference.

Then, after all of that is done, you could focus on increasing your income so that that way there’s more money left over to save and more left over to smash the like button for the YouTube algorithm.

With that said, you guys, thank you so much for watching. I really appreciate it. As always, if you've not already subscribed, make sure to do that, hit the notification bell.

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