Before I started budgeting, I was horrible with money. I had a minimum wage, part-time job, and was living paycheck to paycheck. I also got help from my parents with tuition and some living expenses. But, I still wasn’t making any progress in my financial situation, as my checking accounts always dwindled back down to zero at the end of the month. I couldn’t build up any savings or emergency fund, which was horrible since I couldn’t come up with the funds for an emergency root canal.

In 2014, I started to learn about personal finance and budgeting, and tried YNAB. I credit the YNAB method on getting out of the paycheck to paycheck cycle. Here, I want to go over how I got out of the paycheck to paycheck cycle and was able to save for emergencies and future large purchases.

Importance of budgeting and tracking your expenses

Before YNAB, I had no idea what my expenses were. Sure, I had rent and utility bills each month, and was able to pay for groceries and food. But, my checking accounts always went back down to zero pretty quickly after I got paid.

It wasn’t until I started tracking my expenses and budgeting that I got clarity of my financial situation. I was able to see where my money was going, and that allowed me to clearly see where the leaks were, i.e. where I was spending money frivolously.

For example, one of my biggest problems was shopping. Instead of shopping intentionally, I was using shopping as a pastime. I was bored, so I went to the mall. But once I started tracking how much money I was spending on shopping for clothes, I knew I needed to change my habits. Instead of shopping as pastime, I found other hobbies that were less expensive and more productive.

After getting clarity from my financial situation, I started setting budget amounts for all my categories. I also started cutting expenses wherever possible. I negotiated our internet bill down, bought things on discount, and signed up for financial assistance with the utility companies. Any extra money leftover from the month went to a budget category called the buffer. Little by little, I was able to build up the buffer until it was able to pay for my monthly expenses the next month. I was finally free of the paycheck to paycheck cycle.

Small amounts add up

The key lesson from that budgeting experiment was that small amounts do add up to large sums of money over time. For example, if you are able to cut your internet bill by $20 a month, that’s a $240 savings annually. Add another $10 cut from grocery bills per week, that’s $520 per year. Let’s cut another $10 spend on coffee trips per week, for another $520 per year. Now the savings is $1280. Cut the $80 cable bill and you’re saving another $960 annually.

These supposedly small amounts of savings of $180 per month equal $2160. If your monthly bills equal to $2160 or less, then you’d be a month ahead just by cutting these small expenses from your budget.

Diversifying my income

I also started to diversify my income around that time. I wanted to become financially independent from my parents, which meant I needed to come up with my tuition and international student fee payments. I started to apply for scholarships and was able to win a few small scholarships ranging from $500 to $4000. This was nowhere near enough to pay for all my college expenses, but again, small amounts add up over time. Slowly but surely, I was able to pay for my masters degree in 2015 without any help from my parents.

I also signed up for checking and savings accounts with Ally bank. Before, I was using Wells Fargo, which paid almost nothing in interest. With Ally bank I was getting a small amount of interest payment each month. It was better than nothing.

I also got a small monthly stipend as a graduate research student for my master’s thesis work, and still working a part-time job as a student assistant in my senior design lab. Finally, my income streams exceeded my monthly expenses, and I was able to start saving towards other goals.

Using Sinking Funds for True Expenses

Sinking funds are categories in your budget to save up for those non-monthly expenses. Think of things like your car insurance bill that come every 6 months. Let’s say that you have a car insurance bill of $500 every 6 months, and you want to start a sinking fund at the beginning of the 6 month cycle. Each month, you add $83.33 to a category called “car insurance”. By the 6th month, you’d have $500 ready for the car insurance bill.

Here are some categories I had as an undergrad and masters student. I saved $20 every month until I had the $195 I needed to pay for the GRE test. I also saved $100 per month for my yearly health insurance premium that I needed to pay for as an international student. Tuition was another sinking fund category.

Sinking funds don’t have to be just for bills. It could also be used for saving up for a big purchase. I used sinking funds for things like glasses, laptop, a new kindle, a trip to Big Bear, and a trip back home. I set a date for the funding goal I wanted to reach, and I would add money to the category until I reached the goal. This way, I never really got into debt because I would pay for things I had money for. The only debt I had was my car loan, which was paid off in 2020, and my current iPhone loan. And I only have the phone loan because Xfinity had a discount deal on it with 0% APR.

Saving for Emergencies and our Future

Once I had clarity of our financial situation, I started an emergency fund in my budget. The goal was to save up $1000. Any and all extra money I had after funding all my needs and wants, went into the emergency fund. I reached the goal in 7 months after I started budgeting. Then I increased the goal to $4000. This took a year and several months to reach.

As our expenses have risen over time, so has our emergency fund goal. We aim to have 6 months worth of necessary expenses in our emergency fund. This includes rent, utilities, groceries, insurance, and Oskar’s food and vet bills. We mainly use our emergency fund for true emergencies, not to fund true expenses if we can.

The final category that I had when I started budgeting was an IRA category. I needed to come up with $1000 to start investing at Vanguard due to the minimums for their target retirement funds, so I started saving up. In 5 months time, I was able to cough up the $1000 needed to start investing in my Vanguard Roth IRA. After that, I contributed what I could. $25 a month was my minimum monthly contribution. It wasn’t until 2018 that I was able to max out my Roth IRA. Now, I’m maxing out both my spouse’s and my Roths.

Final words

In March of 2014, my net worth was a whopping $900. By the time I joined my PhD program in August of 2016, my net worth grew to $12000. This was only possible by tracking and cutting our expenses, budgeting, using sinking funds, and investing our money with low-cost index funds. The expenses we cut were small, but over time they do add up to big amounts. By budgeting our monthly expenses and setting financial goals we wanted to reach, our combined net worth has continued to grow, even during grad school.