84: How to Escape Living Paycheck to Paycheck

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0:42Because Marshalls believes everyone deserves access to the good stuff. Visit a Marshalls store near you or shop online at marshalls.com. Hey everyone, and welcome back to the Rich Habits Podcast, a top 10 business podcast on Spotify. My name is Austin Hankwitz and I'm joined by my co-host Robert Croak. Robert is a seasoned entrepreneur in his 50s with lifetime revenues of$300 million and I'm an entrepreneur in my late 20s with a background in finance and economics. Since quitting my full-time job in corporate finance a few years ago, I've built a seven-figure media business and actively advise some of the most well-known fintech companies around the world.

1:20As the show name might suggest, every episode, we talk about rich habits as they relate to business, finance, and mindset. However, we try and bring you two unique perspectives. One from an industry veteran, which is Robert, and the other, myself, someone who's still in the process of building wealth and figuring it all out. So Robert, what are we gonna be talking about in today's episode? In this episode of the Rich Habits Podcast, we're gonna break down the blueprint stage by stage to help anyone listening struggling to get to the next level with their finances and stop living paycheck to paycheck.

1:53Listen to this. 62 % of Americans making more than 100K are living paycheck to paycheck right now as we speak. And that includes 36 % of people making over 250K a year are also living paycheck to paycheck. So this is a serious episode. We're gonna break it down and we're gonna help a whole lot of you figure it out. And if you're someone out there saying, wait a second,$100 ,000 now doesn't buy you as much as it did back in 2019, you're right. But if you're living paycheck to paycheck, you should definitely consider taking the steps that we talk about in today's episode. Robert, we have the Rich Habits Network, and someone actually sent me their budget via DMs a couple days ago.

2:34$15 ,000 a month, which is$180 ,000 a year, and they were still living paycheck to paycheck. They couldn't figure out where their money was going. So this episode, I think, is going to really hit home for a lot of people, not just the ones that are making below that call it$60 ,000,$70 ,000 a year, but a ton of people who are making over$100 ,000 as well. I see it every day. I had a one-on-one consulting call with a couple a few weeks back. They were making$270 ,000 a year collectively, and they were living paycheck to paycheck, and they were only investing$200 a month towards their future, and they have three kids.

3:12And that is why this episode is so impactful for so many people, because I think a lot of people, both single and married couples, do not even realize they're living paycheck to paycheck, because I know it sounds really harsh, but it's just so factual that if you're not putting away money consistently every month and feeling comfortable where you are, you're living paycheck to paycheck, and that's why we're here to fix it. Starting with point number one is to figure out where all your money is going. As many of you know, we always encourage our listeners to create what we call an honest budget.

3:45For us, this means getting out that pen and paper and digging into those bank and credit card statements and just really auditing your monthly spending. Before the month begins, you need to know where every single dollar that you're going to earn is going to be spent. Full stop, period. You have to know what's going to happen. If you do not have this type of visibility into your monthly spending, this episode is your wake-up call. We really encourage all of you that want to nerd out and dig deeper into this subject to listen to episode 80, How to Be Intentional with Your Money. It is an awesome breakdown.

4:17Now, once you've figured out exactly how much you're making each month, but more importantly, how much you're spending every month, it's time to set financial goals. If you wanna get out of this vicious cycle of living paycheck to paycheck, it is time to set financial goals. The most important financial goal you need to set for yourself is saving 15 % of your monthly take-home pay. There is no other option. You have to do this. You have to take it seriously, and you have to be consistent. And this might sound daunting at the moment, but we're going to share with you a playbook of how to achieve it, starting with calculating your debt to income ratio.

4:54And here's how to do that. Add up all of your monthly debt payments. For example, might be$1 ,500 for some of you with your car payment, your student loans, and maybe some personal debt. Then divide that number into your monthly take-home pay. So if you were to take, for example, 1 ,500 divided by$4 ,000, that would lead you to a 37 % debt to income ratio. Now, generally, 35 % to 40 % should be the top of the range you land within, not including your mortgage or your rent. And I always say you either have an income problem or a spending problem or potentially both. And here is when that changes right now here today.

5:35And Robert, if your debt-to-income ratio is above that 40 % mark, it's time to maybe start thinking about selling the car you can't afford. or maybe aggressively pay down that high interest personal loan or maybe even pick up a side hustle that allow you to earn more money every month. The reason why we think that you need to understand your debt to income ratio is because that is what you have control over immediately. If you are spending$1 ,500 a month servicing debt and if you get rid of the debt, congratulations, you now have freed up$1 ,500 a month in your budget. Now we know there's a ton of different types of debt, interest rate matters a lot, and we're not Dave Ramsey.

6:13But what we are is cognizant that 15 % of your take-home pay needs to be saved and invested. And the only way you're going to achieve that is by increasing your income or by paying off your debt. So by understanding your debt-to-income ratio, you now have a clear playbook as to how you can achieve that 15 % in savings. And this might not be easy because so many of you, maybe you just got married, you have a small child, you have a mature family. you can't always reduce your monthly expenses, but what you can do is give up something to create more income. And I know it sounds daunting and it sucks to think about, you're gonna go out and you're gonna get this new side hustle.

6:54But guess what? You have to be able to be willing to do it for your family, for yourself, to get you out of that rut of living paycheck to paycheck. And a side hustle might only be four hours of Uber driving every Saturday afternoon or every Sunday afternoon to be able to put away$500 or$1 ,000 a month to help you get out of this situation. And I'm not saying you're gonna do it forever, but you have to be willing to make that commitment because you cannot kick the can down the road forever and live paycheck to paycheck too long because you will never get ahead and get yourself set up and your family set up for retirement.

7:29And by making the goals that Robert and I are laying out right now and giving yourself something to work toward, you now have a little bit of extra drive inside of you when you are driving Uber or delivering for DoorDash, whatever that side hustle might be for you. You're saying, I'm earning this money so that I can pay this off, so that I can have a little bit more as it relates to building an emergency fund, something we'll get into later. But Robert, walk us through point number two. Stop investing if you can't afford it. And I wanna make sure everyone is taking notes because this one is so, so critical in this episode.

8:01I've been saying for years, you can't out-invest high interest debt. And that's why this section is so important to understand if you're living paycheck to paycheck. Of course, we want our listeners to become investors and build that$100 ,000 base we always talk about. But if you're caught in the cycle of living paycheck to paycheck, all that should matter to you right now is getting out. I do one-on-one calls every single day with people who are buying cryptocurrencies, they're buying single stocks, and they're even investing in real estate while carrying massive amounts of high interest debt and this doesn't make financial sense.

8:38The average interest rate on credit card debt right now is 30 % and the average annual return of the stock market is 10%. This really illustrates the fact that in general, you're not gonna be able to out-invest high interest debt. So by not paying that debt off first, you're borrowing at 30 % interest to potentially make 10 % in the stock market. This is a huge no-no and will definitely deflate your chances of being able to build that wealth for the future because you got to take care of these high interest debts first. And I think, Robert, something people often forget about when it comes to out investing high interest debt is their 401k.

9:18I hear all the time, Austin, Robert, of course I have to invest in my 401k. I got to get that match. I got to invest toward my retirement, all those fun things. I can't stop doing that. Of course you can stop doing that. You absolutely can pause your investing in your 401k for 6, 12, or 18 months and use that extra $250,$350,$450 a month that was going toward your 401k to begin to pay down that high interest debt. Do not fall for the trick of thinking, if I'm not investing every pay cycle to my 401k, I won't retire wealthy. How you will retire wealthy is being able to hit that 15 % savings rate in your monthly budget, giving you the flexibility now to build a lot of wealth over time.

9:58And that might come with some short-term sacrifices. You 100 % have our permission to pause your retirement investing, 401k, Roth IRA, whatever else to pay off that high interest debt. I love it. And it's just one of those things for all of you listening. I know it stinks. You're looking at your credit card debt. It's 12 grand, 18 grand, 22 grand. You've got some money coming in. It's sitting in your high yield savings. You're really interested in buying some Bitcoin or Ethereum because you know the markets are going up. But guess what? Getting a 30 % return by paying off those credit card debts is a fantastic place to be because guess what?

10:35They're never going to stop giving you credit and they're going to keep raising your limits to keep you roped in. And our goal is to get you out of that position so you have some room to breathe. So now that you've built the budget, you understand where all your money's going. You know, what's going to come in. You understand what's going on every month. You've really figured out, wait a second, I am really living paycheck to paycheck here. I need to figure out my debt to income ratio. I need to maybe sell the car I can't afford, pay off some of this debt that I've just kind of been ignoring for a little bit.

11:03Maybe you need to up the income, right? Drive a little bit of Uber or DoorDash or maybe do what I did when I was in my early 20s, sell websites to dog groomers in Nashville. Literally, that's what I did to make some extra cash. So there's a ton of different ways that you can kind of change this debt to income ratio and boost your monthly budget. you're now even maybe pausing that retirement investing, allowing you to have a little extra more money. But now you have to figure out, how am I gonna prevent this from happening in the future? And that is point number three, having an emergency fund and being able to expect the unexpected.

11:34Because again, the only reason you're living paycheck to paycheck is because you're spending more than you make. Sometimes that's because you have an income problem, but more than likely, it's because you might have a spending problem. Now we are super empathetic to emergency situations like a visit to the hospital or your car breaking down or maybe your AC unit goes out. You have to fix those things and tend to those problems. There are a ton of things that will be looked at as an emergency in your budget. If you have a 5 ,000, 10 ,000, maybe even a$15 ,000 emergency fund set aside in a high yield savings account, those unexpected expenses now go from emergencies into inconveniences.

12:15And so when it comes to preventing yourself from going back into the cycle of paycheck to paycheck, having a little bit of buffer between you and life is incredibly important. And I like to call that buffer my emergency fund. The main point here is we don't want you to be paying for these types of expenses with high interest debt and then not have the money in your checking account to pay it off, causing you to carry this debt into the following months. Whether it's a true emergency or simply a new expense from your ever-changing life, it needs to be considered in your budget. So when you get hit with this new bill like Austin alluded to, maybe they raised the school fees, the tuitions, or a sports program went up just a ton.

12:57We never know what's gonna hit us. And the goal here is to make sure that you are prepared. So once that emergency hits, don't forget to begin budgeting for it every month going forward. If it's a price hike or something, you can begin to predict. And then again, it takes it out of being an emergency and puts it into that budget issue where you have to continue to budget for it and be prepared for it. In other words, a budget is a living, breathing thing. You are constantly responsible for assessing your current budget as well as considering how that budget might change in the future because we all know life gets in the way and we are definitely considering that in this podcast.

13:36Living paycheck to paycheck is really, really hard. I definitely had a time in my early 20s where I was living paycheck to paycheck and I had credit card debt myself. And I escaped that by bringing my spending down and by boosting my income. Again, I had a side hustle. And from a spending down perspective, I had to make the hard choices of saying, hey guys, I can't afford to go out to the restaurants and the bars and go to those fun things with you for the next probably six or eight weeks. I've got to really get my spending under control. Or I can't afford, Robert, my at the time 2015 Lexus IS 250 that was a$700-something-dollar-a-month car payment.

14:16I sold that car so I could get rid of the car payment, and I bought a cheaper car that brought my overall spending down by like$600 a month. This is the type of sacrifices you have to make if you're living paycheck-to-paycheck. And the number one piece of advice I could give anyone living paycheck-to-paycheck right now is to forget what your friends think about you, forget what society says, forget what other people think you should be doing. focus on you and what goals you want to achieve for yourself as it relates to your financial journey. It's so, so true. I know it stinks when you think about, you know, you've got the new BMW and maybe you've got the new Jeep Cherokee in the driveway.

14:55Well, guess what? If there's a way to not have two brand new cars and maybe you take a little bit of that money and go buy a used car or a used SUV and keep one of the new cars, there are a lot of different sacrifices you can make to get yourself in line because just remember, sometimes to escape living paycheck to paycheck, you have to go backwards before you can go forwards. I know that doesn't sound fun, but it's okay. We've all had to do it. And if you're willing to make these sacrifices now, it's gonna set you up so much better later on because as long as you let lifestyle creep continue and you never set aside anything for the future, you're never gonna escape this matrix of living paycheck to paycheck.

15:36And it's a terrible place to be. You are an adult, you're listening to this episode. It's time to devise a plan of getting out of the vicious cycle of living paycheck to paycheck and to stick to it. We're rooting for you. 2025's right around the corner. It's gonna be your year and we can't wait to see all the change you make in your personal finance journey. Now, this episode of the Rich Habits Podcast is brought to you by Neos Investments. They just launched a new addition to their high-income ETF lineup that provides exposure to the 2000 small cap stocks that make up the Russell 2000 Index while aiming to provide tax-efficient monthly income to investors.

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16:49To obtain a prospectus containing this and other important information, please visit neosfunds.com and please read the prospectus carefully before you invest. An investment in NEOS ETFs involves risk, including possible loss of principal. The equity securities purchased by the funds may involve large price swings and potential for loss. Past performance is no guarantee of future results. And by the way, we are doing another webinar with the folks from Neos that we are super pumped about. It's going to be on Thursday, October 17th at 4 p.m. Eastern time. And we're going to be talking about how all the Fed rate cuts are impacting the markets today and in Q4.

17:27And we'll be sure to drop a link in the show notes to sign up. I can't wait for the webinar. Troy and Garrett are some Wall Street veterans here that are joining us, and I'm just so excited to see what they think about the Fed's rate cuts and how things might begin to get a little bit more turbulent as we head into another election. Now, our first question comes from Blake. Blake says, I'm 18 years old and I graduated from high school in May. I chose not to go to college, and now I co-own a construction company with my dad. I have about$40 ,000 in savings. $35 ,000 of that is invested into the ETFs you all talk about with$5 ,000 as an emergency fund.

18:01And I drive a paid off Toyota Tacoma. I make roughly$150 ,000 to$200 ,000 a year. I still live at home in order to save money because I want to invest. I'm very interested in owning rental properties. I want to build my own quadplex for myself to live in and rent out the three other spaces. But is it smart to make such a large financial move at such a young age? My dad's almost 60 and I plan to inherit 20 properties when he dies. I want to make more and more passive income so that I can retire early. But the main question is, is it financially smart to maybe go out and build my own quadplex and only have to pay for the labor and materials?

18:35Or will it put me in a hole of debt while I'm young and hurt myself in the future financially? Wow, what a really cool situation to be in, Blake. Robert, I'll let you take this one. So Blake, you're probably not going to love this answer. I'm so excited that you're crushing it. it seems your dad has really helped set you up at an early age. I love that you're getting money set aside to build that base and you're excited about building your quadplex. But here's what I would do. I would instead not build the quadplex yet. I would get my base fully built, get more money into that, let's call it overall strategy of what you're working towards for retirement.

19:11And then maybe if you wanna buy your first property on your own, start a little smaller. Because here's why. Let's say you're gonna build a quadplex. You go find the land. You got to get the land set up and ready. Then you have to build the quadplex. Many times this is going to cost more money than you think and take longer than you think to get it completed because you never know the unknowns of what can happen in real estate. So maybe look at going and buying just a duplex that's a quick fixer-upper. You can do a lipstick remodel. You could live in that for now. But I wouldn't rush into building your first quadplex.

19:44It sounds awesome. But based on how much money you have set aside right now, it could drain all of that. And then if you have delays or overtures in your expenses, then you could put yourself in harm's way to where then all of a sudden on your very first try on your own, you're going out to borrow money from your father, or you might have to raise capital to finish the project. And I don't want to see that happening because you have such a great start. So personally, I build the base further. I would keep living at home. I would keep trucking along and building up your funds and then look to build that quadplex later.

20:19Because let's look at it this way. To buy the land and build a quadplex in almost any market, you're probably gonna be 700 ,000 to 1.4 million, maybe higher to do that. And I just think that's a little out of your reach right now to do it by yourself. So the only thing I would change, Robert, is I think Blake now making 150 to$200 ,000 a year and having some savings and obviously this money in stocks, I think he needs to make a plan to move out. The phrase is an eagle that never leaves the nest turns into a turkey. And I don't want Blake to turn into a turkey. Blake, you are making more than enough money to go find your own apartment, to build your routines, to teach yourself how to cook and do your own laundry.

21:00Like there's some sort of dignity that comes when you live on your own. And doing that at maybe 19 or 20 years old could be a really great goal to give yourself. I'm not saying you need to move out tomorrow or in the next three or six months, but I do think that you should make a goal for yourself to move out over the next, call it 12 to 24 months, because that will give you now a sense of dignity, a sense of pride and self-worth that it just doesn't come with living with your parents. And now understand, you might say, hey, I'm saving$2 ,000 a month by living with my parents. Cool, you make$200 ,000 a year, cry me a river.

21:30You're gonna be just fine, I promise. I love it. That's why we're here is to give two different approaches and two different perspectives on what the best thing is. I remember I bought my first quadplex. at 23 years old. I lived in one unit. I let the tenants pay the mortgage. It was fantastic. And I held that property for probably 20 years and it was a great winner for me, but I didn't know what I know now. In retrospect, I would have never bought that property first because at the time I only had around 50 ,000 in capital and I exhausted all of it to buy the property, close on the property and renovate the property.

22:05And I even got a loan on top of that. And I don't wish that on anyone. It worked out for me, but it doesn't work out for most people. I totally agree. I mean, Blake, move out, grind until you're 24 years old. And by that, I mean, continue to work hard in your dad's company that you co-own, continue to make all the money you can, put that money in the markets, max out your retirement accounts, do everything you can as a young man. And then once you're in that, call it 23, 24, 25, do what Robert said. You've got your base built in its entirety. You've got hundreds of thousands invested. You've got tens if not hundreds of thousands ready to be deployed into real estate in a responsible and profitable manner, right?

22:46That's when you should begin making those moves. I agree. I think Robert was right here. You are a little bit more on the early side to take on this much risk. With that being said too, something else kind of unrelated that I wanted to share is how cool is it that Blake's dad did everything right? I mean, we hear about the term generational wealth. And then when Blake over here, who is an 18 year old, who's now making all this money, he's living at home. him. He wants to do all these cool things. People are probably like, oh yeah, Blake, his daddy hooked him up, right? His dad did it all for him.

23:13He's daddy's boy. Heck no. Blake's dad did everything right. We all want to give our children the opportunity to make a ton of money and be wealthy and pass on everything of the hard work and all the assets that we've acquired throughout our lives. But as a society, we make fun of people who receive that, right? You know, they were a baby with a silver spoon in their mouth. You know, they never had to work for it. No, I'm a big proponent here and to Blake's dad. He did everything right. He's setting his family up for generational success. And I could not be happier for Blake. I agree. And I really like that outlook that you just proposed because so many people, there are a lot of, a lot of children out there that are coming into adult age whose parents set them up and they still screwed it up and they did not take advantage and accelerate what their parents helped them do.

23:58And that's why I think it's so important to understand getting that extra boost. Although not all of us were able to get that and had the benefit of that doesn't mean you're still destined for success. You still have to run with the ball. And that's why I love Blake is taking it serious at an early age. He's really working hard and I would just keep my foot on the gas, keep doing what you're doing and just delay building on your own till you get a little further along and have that base built. And that way I'd feel more comfortable that you can't go broke and start over because you went too soon.