Most American’s today live from paycheck to paycheck. This simply means that they have only once source of income, their paycheck, that they have to use to pay for bills and expenses, entertainment, gifts, charities, etc. If they run out of money from one paycheck, they have to wait until another paycheck arrives. Many people are very comfortable living paycheck to paycheck, but to me, relying solely on your paycheck for income is extremely risky.
Many people live paycheck to paycheck because that’s the only way they know how to make money, by working for it. In exchange for a person’s time, effort, and knowledge, an employer pays him or her a wage. The majority of us are taught from an early age that if you’re broke and need money, you need to get a job. We’re also taught that if you need more money, you have to ask for a raise or get a better paying job. High school and college helps re-enforce this idea about money. While I was in high school and college, I wasn’t taught anything about money. I wasn’t taught how to invest in the stock market, how to prepare my taxes, how to make my money grow, not even how to open a checking or savings account! I was taught a few things though, and they were to work for my money, and save most of it in a savings account. While you should save some money, you should also make that money grow by investing it in something.
Also from a young age, we’re taught buying a home will be the biggest investment you’ll ever make. But in reality, unless you paid cash for your home, your home is a liability. It makes absoultely no income for you, while you pay the principle of the mortgage plus interest. Sure, it may appreciate in value. But while you’re still living in it, it’s a liability, not an asset. If you’re living paycheck to paycheck, and have a mortgage on the house you’re living in, then that is the riskiest financial situation to be in. That’s because if something were to happen and you were no longer working, or capable of working, how would you pay the mortgage?
Not only is living paycheck to paycheck risky, but a large percentage of earned income goes towards taxes. People who live paycheck to paycheck have to pay Federal, State, and FICA taxes. Depending on their income bracket, that can be a huge chunk of change. In school, we’re taught that taxes are just another party of life, and like death, are unavoidable. That’s true if you live paycheck to paycheck, but there are legal ways to not pay taxes on money you make. If you don’t believe me, read my article on Tax-Free Municipal Bonds.
The last reason why living paycheck to paycheck is so risky is because if you don’t work, you don’t get a paycheck. The rich make money while they’re sleeping, watching television, hanging out with friends, or traveling the world. Even when a rich person dies, the assets he or she created would still be making money, and those assets can be willed to heirs. But by living paycheck to paycheck, you only get paid if you work. You don’t get a paycheck while sleeping. You don’t get a paycheck if you suddenly can’t work because of an illness, accident, layoff, or get fired.
Learn how to make your money work for you, instead of you working for your money.
