Tired of Living Paycheck-to-Paycheck? Reduce your Income

Tired of living paycheck to paycheck? Reduce your income. That’s right, take a pay cut – an artificial pay cut.

Why Take a Pay Cut?

I believe most people live week to week, needing their next check because they do not know how to save. A check comes in, the cash is in hand, and we spend it. As Americans, we learn to spend, spend, spend. It’s the American way to compete with your neighbor and buy things to fulfill a short-term desire. Generally, if we have money sitting around, we’re going to spend it.

This is why I recommend artificially reducing your income. Savings is really nothing more than a safe spot to store or even “hide” money from ourselves and our poor spending habits. The challenge is forcing ourselves to do this every week, especially once we see the cash. So, I found a solution that works for me. Direct Deposit.

Direct Deposit – Your Artificial Pay Cut

Yes, I know a lot of people use direct deposit; it’s nothing new. Not everybody with direct deposit saves though. This is because the money generally just goes to a checking account where we have easy access to it, the whole amount. The trick isn’t direct deposit itself, but in automating multiple direct deposits to different accounts.

Gold Piggy Bank

If you setup your pay (and most employers will do this for free) such that it goes into at least two accounts, it is very easy to force yourself to save. All you have to do is put a fixed percentage into a savings account (at least 10%), then the rest in your checking. Notice I said to fill the savings account first, then put the remainder in your spending/checking account. This is a crucial attitude shift that will drive good savings behavior. I’ll explain more about this in a later post, but the key take-away is to always pay yourself first.

You can make this as simple or complex as you want, but the point is to automate it. Speaking from personal experience, most of us don’t have the self-control to set aside savings each week. But if you set it up once, and let the bank do it automatically, savings just becomes routine. You take on the mindset that only checking is accessible for expenditures, and adjust your spending accordingly.

As an example, I split my direct deposit into four accounts: checking, cash savings, brokerage/investments, and Roth IRA. Let’s start with the Roth. Starting in 2008, the maximum contribution limit is $5,000/yr. In 2007, I put $100 per week into a holding account ($100/wk x 52 wks = $5200 dollars) so that at the beginning of 2008 I would have $5K available for my retirement account. I’m doing the same thing during 2008 for next year’s contribution. The next part of my pay is deposited into savings and brokerage accounts; the brokerage account being more for long-term savings, and the cash account for unexpected expenses, or the occasional gift for a friend. (You could also create a CD or CD ladder). I live off of the remainder, which gets dumped into my checking account.

Where to Start

If your employer or current bank cannot handle multiple direct deposits, I’d suggest setting up an account with an online banker, such as INGdirect. You want to make sure the bank is insured by the FDIC, and offers free recurring ACH transfers. ACH stands for Automated Clearing House. It’s one of the networks banks use to transfer money. INGdirect does offer this, and is very good at it. It has the ability to be a central deposit for you. You can have your paycheck deposited to ING, then setup ING to distribute a portion to your checking account on any time interval you want. You can do the same with your savings portion, or you can leave it in ING to grow. Banks like this generally offer very good interest rates also.

After you start doing this, you’ll never notice the savings portion missing. You just come to expect a smaller paycheck each week (essentially you’re paying yourself the remainder after savings). Then, when it’s time to make a big capital purchase, or an unforeseen expense arises, you won’t have to worry about where the money will come from.


  1. Kevin

    August 15, 2010
    3:06 PM

    I understand your suggestion about direct deposit.My issue is that I am catching up on overdue bills and putting that 10% away would make difficult to cover the bill payments,and even now without putting away the 10% after I pay the bills I have no spending money left for myself. Do you have any suggestions?

  2. Shawn

    August 15, 2010
    4:23 PM

    I hear you Kevin. But you are probably getting a better ‘return’ by paying off any interest bearing debts (esp. credit cards) right now than putting money in a savings account.

  3. Darrell Place

    July 4, 2011
    8:59 AM

    Kevin & Shawn are both right and wrong at the same time. I have discovered paying down the high interest debts & not saving is a catch 22. You’re paying down the credit card bills and feeling good. The first unexpected expense – car repair – family emergency, you need to use the credit card again as you STILL haven’t started saving. It become a viscous circle. If you can’t start out at 10% start small. Say four percent, 2% into long term savings & 2% into an emergency fund. Increase it by 2% every three to six months until you reach your goal.

  4. elkbark

    September 25, 2012
    9:22 AM

    I use a similar method but there’s a twist that makes the concept work even better for me.

    I have DD accounts setup.
    1) Checking Account — Fixed $$ amount needed to support my living expense budget

    2) Brokerage Account/Savings — variable amount that is the difference between Net pay and my fixed $$ amount going to checking.

    The beauty of this approach is that I automatically save any bonuses and pay raises, and if I want to increase my budget/spending, it has to be a conscious decision to either transfer money from savings to checking or a conscious decision to change my DD setup. There’s not mindless inflation of my spending just because “the money is sitting there” or the “income went up”.

    Note this Net pay value is after all of the automatic deductions for 401K & IRA.

  5. elkbark

    September 25, 2012
    9:27 AM

    The difference between your approach and my approach is this:

    Twincommas says, “Automatically set aside a fixed amount of savings, and the rest is spending.”

    I say, “Automatically set aside a fixed amount of spending, and the rest is savings.”

    Both approaches are vastly superior to manually deciding what is savings and what is spending, but I think it is clear that my suggestion leads to more spending discipline, and has some built-in savings escalation.

  6. Fossy

    September 28, 2012
    6:37 PM

    Kevin, one word – downsize. I did this recently and it was so liberating. I haven’t even needed to work full time any more and feel so much more in control of my finances. I moved into a smaller house where I simply couldn’t have a lot of stuff and didn’t use as much electric etc. At the end of the day if you have need of more money than you have coming in, you either need higher earnings (not always easy!) or lower outgoings, and realising what you really _need_ in life is rewarding in itself. I appreciate this is quite a simplistic view. Patience and a regular plan to cut into those bills will gradually pull you in the right direction. Good luck.

  7. Oday

    October 4, 2012
    9:16 PM

    As long as you spend less than what you earn and have a personal budget (that includes savings) you can never go wrong. The first step in staying out of debt is to shred all of your credit cards and throw them in the trash where they belong. Then try the envelope system. Label a few envelopes with categories out of your budget; entertainment, SAVINGS, food, gas, etc. Fill each envelope with however much (cash) you want to spend for the month (or week). Whenever you need to make a purchase, pull money out of the appropriate envelope. It’s a simple, easy, and almost foolproof way to limit your spending and save money.Once your budget is in place and your spending is under control, you’ll have a much easier time avoiding debt.

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