Pay-As-You-Go Living
How would you feel if after paying your utilities, taxes, and insurance each month you were free to spend the rest of your income on anything you wanted? What difference would that make in your attitude at work? What difference would that make in your stress level? What difference would that make in your ability to adjust to economic setbacks? It’d be like winning the lottery, wouldn’t it?
What I have described is pay-as-you-go living. It is the ultimate goal of a cash-based lifestyle.
What it takes to live pay-as-you-go
To live pay-as-you-go, you must have the following in place:
- No debt, not even a mortgage.
- Limited contractual obligations such as cellular phone plans, cable or satellite television plans, spa memberships, alarm monitoring services, and so forth. Ideally, you would have none of these.
- An emergency fund to cover six to twelve months of essential living expenses in the event of a job loss or reduction in income.
- Enough savings in addition to the emergency fund to allow you to pay cash for medical deductibles, maintenance and repair expenses on your house and vehicles, and big ticket items such as, furniture, major appliances, vehicles, and so forth.
What is left are those monthly bills you can’t avoid: utilities, insurance premiums, and taxes. That’s it. With the exception of those few obligations, you start fresh every month. You decide how your money is spent each month.
You can get there from where you are today
Does this sound impossible? Believe me, it’s not. But getting to pay-as-you-go is a years-long process. It begins with a detailed budget that includes monthly set-asides for unpredictable expenses such as medical deductibles and co-pays, vehicle repair, appliance repair and replacement, and house maintenance and repair. These expenses will occur, you just don’t know when, or how much it will cost. You provide for them, in advance, each month, so they don’t bust your budget and force you to take on new debt when they do happen.
Savings is a budget priority, even above accelerated debt repayment. It is savings that insulates you from taking on new debt. Building an emergency fund is the top saving priority. Once an emergency fund is fully established, then accumulating an additional reserve of cash is the next priority.
Regular payments are made on debt until a solid foundation of savings is established. As a debt is retired, the money that had been going to repay that debt can be applied to accelerate the repayment of another debt, or it can be redirected into savings, or it can be split between accelerated debt repayment and savings. Once the emergency fund has been completed and there is some money in the cash reserve, a portion of the money that had been budgeted to build savings can be applied to accelerated debt repayment.
Progress produces more financial freedom
As you accumulate savings and pay down debt, you will discover that you have control over more and more of your monthly income. You get to choose how it is spent. More choice equals more freedom. Financial freedom grows as you move through the process.
The last piece to fall into place is the elimination of mortgage debt. This will likely take years to accomplish. How quickly you elect to pay off your mortgage depends on many factors (an earlier post discusses this issue). Once the mortgage is retired, you are living pay-as-you-go.
It gets easier as you go along
Even though it takes years to arrive at pay-as-you-go, it isn’t an all or nothing proposition. Every step you take along the way increases the amount of money over which you have control. And the farther you move along the process, the easier it gets. The hard part is to commit to the process and make a beginning.
K.C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle, Double-Dome Publications, 224 pages
