Living paycheck to paycheck? Understanding the path to financial freedom

There is a widely known saying in Swahili that goes 'Pesa haikosi matumizi' meaning 'There is always a way to spending money'. As this saying suggests, there are a lot of things one can spend money on, such that one might find themselves living paycheck to paycheck. But how does one free themselves from that situation?

Contrary to what many people think, the first thing to do isn't setting up a budget. Setting a monthly budget without knowing your habits is futile. You are likely to relapse and go back to your bad spending days. Instead, before setting a budget, start tracking your expenses daily for a period of at least 3 months in order to know your spending habits deeply, only then you can go to the next step.

Make a budget with an aim of spending no more than 70% of your income. The other 30% can be allocated to investing 20% and saving 10%. Since you already have no money, the priority is to grow your income. Here one can decide according to their risk appetite. You can opt to have no savings and invest the whole 30% instead. I personally wouldn't recommend this for emergency purposes.

After having some investment funds, most people would just invest in something passive. Example shares or bonds. If you are living paycheck to paycheck, you are better off taking big shots for more increase in income. If you are business oriented, then starting a side business is recommended here. If its trading then find something you can buy cheap and resell. If its a service which is better because they generally have higher margins in small scale then find something that pays well and use the investment funds to start up providing the service. This can work even if you are not business minded. Its a side hustle to get you more income.

You will probably fail a few times trying out several side hustles and businesses. That is okay and part of the process. If you keep learning along the way, you will find one that is profitable and will increase your income. Here is what most people do: They increase their spending and return back to square one. You shouldn't do that. Instead keep living under the terms of the initial budget and subdivide the profits of your side hustle into 2. 50% savings and 50% reinvesting into the profitable side business. This is for a medium risk profile. If what you are doing is highly profitable and hot, plus you already have a 6 month emergency fund set up, you can choose to put more into reinvesting if you have more risk appetite.

Go big but don't go home. Now here is where most people also fail. They have a business, service or job working extremely well and they go all in. Nope. Smart and successful people always have hedges on big moves. A hedge is a protection mechanism in case the big move goes badly. For you this will be a readily available well paying job. If you don't have a job at the moment then this will be relatively passive income investments. This is your dividend paying stocks, interest paying bonds, mutual fund payments like UTT Amis and rent payments from real estate. You can start accumulating these as soon as you have a 6 month emergency fund set up. This will be your new zero point in case everything falls apart.

When freedom? Most billionaires don't spend from their businesses. They spend money from passive income sources that have been paid for by profits from their main business. This is the concept you should learn if you are living paycheck to paycheck. First know thyself. Then budget at least 20% for starting a side hustle or job. Then grow your side hustle and savings to get an emergency fund and more income. Then while maintaining a low budget, go as big as you can with your now business or high paying job while continuously investing in relatively passive income sources. Then start to spend income from passive sources when the income is able to cover your more free lifestyle. Financial freedom achieved. Happy journey, fellow hustler.