Many people now seem to believe that going to college, getting good grades, and securing a good job doesn’t necessarily translate into a life of financial freedom. Far too many professionals with good jobs are struggling with their finances and living paycheck to paycheck. In fact, you’ll be surprised that many professionals earning more than $250,000 actually struggling to get by financially.
To start with, we need to acknowledge the basic expenses of food, shelter, clothing and taxes, which must be paid. The effective tax rate for someone earning $250,000 per annum is between 30% and 40%; hence, the actual take home pay for professionals is much lower than what is written on paper.
Professionals need a room over their heads – we can realistically assume a mortgage of a house worth $1M at a 20% down payment and 4% interest rate. The USDA notes that it costs about $1,100 per month – multiplied by 12 months to feed a family of 4 as at June 2017. If we go ahead to factor other expenses such as student loan repayments, auto loans, private school for the kids, clothing, entertainment, and pets – the $250,000 per annum earnings doesn’t seem to amount to much.
Here’s how to avoid the rut
1. Increase your income (make more money)
The first way to avoid the financial rut of living paycheck to paycheck is to find ways to increase your income. As a professional, you may want to consider picking up extra shifts (if shifts are applicable in your industry). You may want to consider taking on extra projects if you work in an industry where payout it tied to performance. You should consider working as a freelancer or contractor to offer your skills and services to a non-compete client. You may want to consider providing consultancy services to other businesses or startups in your industry.
However, there’s only so much work you can do to increase your earnings because the time and effort you have to do productive work is limited. Hence, you should consider finding ways to get your money to work for you by investing in opportunities that could generate passive streams of income.
2. Reduce your expenses (spend less money)
You can also avoid the financial rut of living paycheck to paycheck by finding ways to reduce your expenses. The odds of escaping the paycheck rut and achieving financial stability depends on your ability to make smart spending decisions. You can cut expenses by adopting a frugal lifestyle to buy the things you need instead of buying everything you want. You may want to consider cooking at home instead of ordering takeout. You should also consider paying attention to recurrent bills such as utilities.
Another overlooked way to ensure that you don’t have too much unexpected out-of-pocket expenses is to have insurance. For instance, auto insurance will protect your finances if you are involved in an accident, auto insurance can cover the cost of repairing or replacing your car in the event of accidents or vandalism. Health insurance also covers healthcare costs such as tests, drugs, and surgeries – cost that could cost a fortune to pay out of pocket.
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