My 2016 Budget Challenge: How to Buy a House When You Live Paycheck to Paycheck

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[Editor's Note: This is another episode in Max Wong's journey to find an extra $31,000 this year. Read the whole series here.]

Living paycheck to paycheck is a nightmarish financial treadmill. No extra cash means you cannot take full advantage of small financial windfalls that come your way by compounding your savings.

Compounding savings is a key financial skill to master. Too often, we try this or that money saver, but then we don't actually bank the money we save so that it can accrue interest for our benefit, or reinvest the money on skills or tools that result in even greater savings or earnings.

When I pitched this story idea to my Wise Bread editor, he responded with this personal tale of woe:

When I quit smoking, I stuffed $4 a day into a jar (because that's what that nasty habit was costing me) and kept that up for 90 days. I blew it on a big cocktail party with friends. Like an idiot, I stopped stuffing $4 a day in that jar, but if I had…Calculates…(4850 days x $4 = $19,400). Dang. I wish I hadn't done the math.

Not to rub it in, but if my editor had put his cigarette money in the bank and let the interest compound, he could have saved even more than $19,400!

I compounded my savings to crawl out of poverty when I was in my 20s and living paycheck to paycheck. At age 28, largely due to hyper-vigilant saving and strategic reinvesting on small items, I was able save the down payment on my house in Los Angeles. Here's a super simple version of how you can dramatically improve your financial future, even if you can only scrape together $100 in cash. By the way, the below case study is actually based on my real life.

My Five Year Plan to Buy a House Before Age 30

My goal was to buy a house before I turned 30. However, my first job out of college only paid $12,000. Since I could barely keep food on the table on that salary, the only reason why I had $100 in savings at the end of the year is because I dutifully recycled bottles and cans from the trash at work.

Total Savings: $100

Year Two

I use $50 from my savings to buy a used soy milk maker for $20 at a garage sale. Even though I spend $30 to buy a year's supply of organic soybeans, I use about five quarts of soy milk per week for cooking and drinking, so making my own soy milk saves me $10 per week. This weekly savings allows me to stretch my food budget because I now have the spare cash to bulk buy my staples when they go on sale. I save $520 on soy milk and an additional $500 on groceries for the year. I am still collecting bottles and cans…

Total Savings: $1,170

Year Three

I keep $500 in savings. Yay! I finally have an emergency fund! I spend $100 on canning jars and spend the remaining $570 on classes and tools to start keeping bees as a hobby. I make $700 off selling homemade jam and $960 from selling honey. My beekeeping hobby pays for its start-up costs in five months!

Total Savings: $3,330

Year Four

I put an additional $1,000 into my emergency fund. I spend $1,300 on computer classes. I spend $1,000 on a fancy Dutch bike to take the place of my car for commutes under five miles. Overshare: I spend $30 on a menstrual cup to replace tampons. My additional education allows me to get a promotion to a position that pays $40,000 per year instead of $12,000. The bike saves me $1,200 in gasoline and car costs. I save $72 in tampon costs over the course of the year.

Total Savings: $30,772

Year Five

I buy a house! I spend $25,000 on the down payment for my house and related real estate expenses. I use $4,000 to open a Vanguard IRA. I keep $1,500 in my emergency fund. I use the remaining $222 to pay for additional beekeeping equipment that allows me to expand my honey and jam business. I make $4,000 off of honey sales.

Total Year Five Savings: $5,500

Year Six

Rinse and repeat.

I neither invented nor perfected the idea of compounded savings. In fact, a number of financial gurus have calculated how much money could be saved in a lifetime just by giving up small purchases like fancy coffee or cigarettes. Banking small savings is such a common financial trope it even has a nickname: The Latte Factor. I originally learned about compounded savings from Amy Dacyzyn. Her newsletter and books taught me that strategically reinvesting tiny sums of money in the form of tools and education would improve my bottom line exponentially. It's not enough to put your money in savings. It's much smarter to use part of your savings to reinvest in you.

Here Are Some Tips To Keep You on Track

If you'd like to try compounding your savings, here are some hard earned bits of advice — and a few caveats.

Do What You Love

This type of savings plan is a multi-year commitment to living in extreme poverty. When choosing tools and skills, it's best that your purchases are related to a moneymaking activity you love, so you can stay motivated on the job over a long period of time. For example, if you hate the great outdoors, do not buy an axe so you can start your firewood company, even if you live next to a huge stand of deadwood and can harvest firewood for free.

Reduce and Reuse

Buy reusable replacements for expendable goods or tools that allow you to make DIY versions of your favorite things. For example, replace disposable diapers with cloth diapers to save on baby costs. Or, use cleaning rags, made from worn out clothes, instead of paper towels for gross chores.

Make Money From Your Pastimes

Look for opportunities to monetize low-cost activities you already do for free. I bought canning jars because I love to make preserves and knew it would be a pleasurable way for me to make extra money. If you are a parent who already has to babysit your own kid after school, why not babysit someone else's kid at the same time for cash?

Set Goals

Most importantly, set a specific goal for your money. I really wanted to buy a house before I turned 30. I was able resist the peer pressure to spend money I didn't have and resist the urge to buy pretty much everything for almost half a decade, because I wanted a house so badly.

Here are some other things to note about my case study.

My Strategy Was Conservative

If I were financially more sophisticated, I could have made much more in those five years by investing in the stock market or, at least, parking my money someplace other than a savings account.

I Failed to Take Advantage of Government Services

I was so financially unsophisticated, that I didn't realize that my low salary made me eligible for food stamps. That extra $100 each month would have revolutionized my life. If you are living paycheck to paycheck, make sure that you are using all the benefits that are available to you.

That Big Promotion Really Helped

While it is rare to get a promotion anywhere near $28,000, it's also rare for a college graduate to accept a starting salary of $12,000. Most people who have the time to read personal finance blogs are either totally unemployed or make wages that don't put them so far below the poverty line. If I had made even $15,000 a year those first few years, that would have given me an enormous advantage — for example, I could have opened a retirement fund much earlier.

I Trusted Education Would Pay Off

Since I paid for two entire years of my life by selling items that I had trash-picked at garage sales, I seriously considered buying a used pick up truck for $1,300 instead of taking computer classes in Year Three. It was a gamble: I knew that I could make an additional $12,000 each year trash-picking with a truck and didn't know if continuing my education would amount to a raise that was equal to that. Luckily, my extra schooling paid off in a huge way.

I Was Lucky

I was fortunate that I didn't have a major health crisis during my 20s. That would have wiped out my savings.

I Ate Well

To live on $12,000 a year I had to eat a near vegetarian diet. I rarely purchased meat and my big foodie splurge was buying 2% milk for my coffee when it went on sale.

Rental Housing Was Cheaper Then

Up until I purchased my house, I had never spent more than $550 on housing. Although living on $12,000 would now be much harder to do in Los Angeles due to insanely high rents, I am replicating a lot of strategies I learned when I was saving up for my house purchase for my 2016 Budget Challenge.

Progress Report

After five months of grinding away, I feel like I've finally gotten some momentum. In the past two weeks, I have created another job to my spectrum of part-time employment opportunities: bee dealer.

It's swarm season in Los Angeles. This sounds alarming, but really, when bees swarm they are just looking for a new place to live. I was lucky enough that three separate swarms took up residence in empty hive boxes in my backyard. When I mentioned my new popularity to the master beekeeper I am assisting, he told me that he has an orchard client that will buy bee packages from me for $150 per colony. He picked up the three boxes of bees the next day, and I made a cool $450 from free bees. The master beekeeper also showed me how to convince my bees to make extra queens so I can split my two huge hives into smaller colonies that I can sell to the orchard. I made two splits and made an additional $300. The orchard wants to buy 25 packages of bees this year, so potentially I could make $3,750 from selling bees over the next few months.

I joined forces with a fashion designer friend and my tea importer friend and hosted a sample sale in my house. I made $56 selling jam and honey and $458 selling random vintage stuff that I've been too lazy to put on Etsy. The sale was so successful for my two friends that we're going to do another sale in July. I took a bunch of items that didn't sell to a local consignment store that takes house wares. I got $100 in store credit that I used to buy presents for friends and family. While this $100 credit won't count toward my $31,000 budget challenge, it will save us on gift costs come Christmas.

I also gathered up every piece of old video equipment I could find in my garage that I am not using and sold it for $575. Although I'd originally spent around $1500 to buy the equipment used, in another year most of what I sold will only have value as parts, so I was happy to get the $575.

I managed to have a few little windfalls. I managed to sell a video game that should have cost $5 for $23 to a rabid collector who wanted a pristine copy of Ratchet & Clank: Quest for Booty. (I am not going to judge.) I also sold a book on half.com for $93 that had been up for sale for so long, that I had given up on selling it online, and stuck it into a box earmarked for the next garage sale. Also, it pays to tell everyone you know that you are looking for work. My friend Giselle paid me $100 to drive her to the airport. (She gave me the Uber's surge pricing rate! Sweet.)

Last but not least, I made $450 from writing gigs. In total, I made $2,505 in the last two weeks!

Alas, Mr. Spendypants has been working 18-hour days all week so he has not had a chance to do anything but sleep when he comes home. His savings will be added (or subtracted) from the total of the next pay period.

Goal: $31,000

Amount Raised: $18,880.84

Amount Spent: $10,653.66

Amount Left to Go: $22,772.82