From a very young age, I knew that money was necessary. When I was making wishes as a kid, I wished for money (or a magic wand which is the same in this age). I was also lucky to be born into a family of professional engineers who believe that a good education and hard work will pay you.
My initial view of money was: get much of it, and everything will fall into place. So, I followed the classical career path: working hard during my studies, working hard after I graduated, sacrificing a lot, and finally starting to get results. My first real job was in the 60th percentile of the market (not a bad start!), and then I basically doubled my income every three years, which brought me to the infamous 1% of the population in a reasonable amount of time.
Here I was, a successful career woman, making six figures and looking pretty decent outside. People did think I was rich. I did manage to get a lot of stuff, but the more I earned, the more I spent. I didn’t even notice the constant creep.
Spending creep
Usually, it went the following way: I was announced the next rise, I was excited, and I thought, now I can get X (put anything of next-level spending instead of X)—and I got this thing even before my increased paycheck. Why not? I can afford it! …at least, I told myself so.
When you make decent money, you don’t have a shortage of opportunities to spend them. It’s not about simple shopping therapy; it’s more about next-level items and services that were previously out of reach for you. And the companies providing them are damn good at persuading you that you really need them at next level status. Why buy a Chevrolet if you can afford a Mercedes? Why wear Tissot if you can afford Rolex? Why get a Couch if a Birkin bag is there?
And then comes the financing. You don’t need thousands of dollars at once; the caring company will provide you with zero-percent financing for three years. And now your Rolex costs you only $277/month. Do you really care if you are making six figures?
That’s how I lived: dressed in designer clothes, driving a brand-new luxury car, having everything I could imagine. And I don’t have any debt! (As I thought, because I paid all my credit cards and bills each month.)
Wake-up call
So what was wrong with the situation? My wake-up call came one day when I had to pay for my daughter’s summer camp. To tell the truth, I completely forgot about the upcoming payment, which shocked me. The bill was about 4K, which should not be a problem at this income…. But I was not able to pay it: my credit cards were maxed out, and I knew that my upcoming payroll would cover only this amount; I didn’t have any money set aside, simply nothing. I had to go to a bank and take a personal loan to pay for my daughter’s camp…
And then I sat and started thinking. I was leaving my childhood dream, making as much money as many people could only dream of, but I lived from paycheck to paycheck. It finally dawned on me that amount of money was not an answer. There must be something else. Worse, now I had a debt and was living paycheck to paycheck. Welcome to reality! I felt like a failure, apparently. I was so bad with my finances!
Later, I learned from my colleagues and clients that my situation was completely “normal” and that many successful professionals live from paycheck to paycheck. But I also learned how to overcome the status quo and turn the situation around.
Way out
As they say, money issues are 20% math and 80% behavior. This realization helped me to see my way out. I had to understand the math, and I had to work on my behavior.
Math
Math was the easiest: I had to figure out how much I got and where I spent. The payroll part was straightforward, as I work full-time. Simple downloading my paystubs opened my eyes to the amount (pat on my back once again!). The spending part was tricky, here are the best practices I learned from my experience:
- If you have multiple streams of spending money (multiple credit or debit cards), you probably need a special app to track everything. The apps are usually not free, but manual reconciliation in spreadsheets costs so much time that they are worth it. Look for apps that can link transactions between multiple accounts.
- You need time to understand your spending patterns. One month is not enough. The best term is 3-4 months, and there are still some recurring expenses that you will catch long after that (up to a year).
- We tend to think that the last month was “special” and that the next one will definitely be better. Here is a spoiler alert: all months are special!
After I learned the ropes, I managed to put everything into a budget—although a six-figure budget sounds silly. Let’s call it a spending plan. Having everything in one place helps me keep track of current and future spending and start to correct them…
Correction
Here comes the hard part: correction is about changing behavior, and it’s HARD. Here is the summary of the best practices (though this part deserves the whole book):
- Define your needs and wants. This requires some soul-searching, but it will guide your future financial decisions.
- The simplest part is to cancel unneeded subscriptions. It’s amazing how many services and items I had that I didn’t really need. I didn’t need a landline phone, I didn’t watch TV, and I had a lot of monthly subscription boxes and services…
- Then comes shopping behavior. Stopping at a store on the way back from work became a habit. I didn’t need anything – but I like the feeling of buying. So, I practiced not shopping: when I was tired, I just forced myself to skip the store and head back home. I use other treats (e.g., having a glass of wine while watching a documentary at home) as a substitute for shopping. When I was not tired, I practiced going to a store and NOT buying anything. It was hard initially, but with time, it became a fun game for me.
- Downshifting is hard, as it involves changing self-image. Even such apparent steps as giving up the luxury car and getting a standard car are painful for personality. You may need some professional help to get through this phase. I had to work on pretty much everything: car, clothes, food, watches, furniture…, and even a pen! This is probably the most impactful phase not only for financials but also for personality. One becomes better when the person stops associating the self-image with stuff.
- No big moves, but small challenges. You usually spend 1K per month on food. You decided it was too much and wanted to pay $700 monthly. Can you do it next month? Answer: maybe once, but it will make you completely miserable. But you are aiming for sustainable change. Instead, you should move very gradually: challenge yourself to spend $950 next month, and you will succeed! Repeat the process for 6 months, and you are there, happy and motivated! In reality, the significant shifts are what make most people fail at budgeting. Do not pretend that your psychology is different from others.
- Adopt a rule of “find the money first.” We often spend “in advance,” knowing that the paycheck is coming. Instead, start spending money only if you have real money. You will need some budgeting application for it, as you need to check if you have money before each purchase, but this habit really helps in the long run. It also prevents “lifestyle creep” at your next rise, even before you see the money.
- Finally, I started to hide money from myself. I opened separate checking and saving accounts, each serving a unique purpose (paying that personal loan out, stashing cash for big purchases – such as a new car or house, and savings for any case – so I don’t have the summer camp story anymore). I redid my direct deposits from my paycheck. The way that money does not come to a single account but rather is distributed between accounts in order of priority. I budget only money coming to the “spending” account – and forget about all others.
It’s hard to make the transition alone. Behavior changes are complex; they interfere with emotions, and progress is not always apparent. But the transformation is entirely doable, and many of my clients are proof of it.
At the journey’s end, paycheck-to-paycheck leaving seems like a forgotten nightmare, and people are more confident, calm, and happy.
Katty's Wallet 