It’s Friday, you just got paid, and you’re ready to enjoy your hard-earned money. New shoes, dining at a trendy restaurant, catching a movie—before you know it, your paycheck is gone. Managing your money can be daunting, especially when you’re not sure where to start. But fear not, because today, we’re breaking down the eight essential steps to take with your money as soon as you get paid.
Do this Payday Routine For Financial Success
It can be tempting to buy those new pair of shoes or dine out when you get paid but you should have a payday routine in place as your future self will thank you. Having a payday routine in place will not only make sure your bills get paid but also set up your future financially.
Follow these steps when it’s payday to make sure you get started on the right foot.
Step 1: Find Your Financial Baseline
The first and most crucial step in personal finance is determining your financial baseline. Many people avoid this step because it feels like too much work, but that’s precisely why so many struggle. In fact, 64% of Americans live paycheck to paycheck, often due to a psychological trap known as mental accounting. This is when you mentally categorize your money instead of physically writing it down, leading to poor financial decisions.
For example, if you receive a tax refund, you might consider it “extra” money and splurge on a new PS5 or TV. However, this money is the same as your regular income—it’s just a refund of overpaid taxes. The solution is simple: open a spreadsheet and account for all your monthly expenses, from rent to pineapple pizza. By doing this, you’ll discover how much you need to survive each month with your current lifestyle.
Step 2: Identify and Eliminate Non-Essentials
After listing all your expenses, delete those that aren’t essential—yes, that means Netflix, Candy Crush subscriptions, and even your stapler collection. Subscribe to my free weekly newsletter, Rethinkable, to build a wealthier and healthier life (link below). After a thorough self-reflection, you’ll be left with core expenses:
- Housing: Rent or mortgage should be under 30% of your income.
- Groceries and Food: About 10% of your income.
- Insurance and Utilities: Internet, cell phone, and electricity should be around 10%.
This number is your financial baseline, the bare minimum you need to survive each month. Aim to keep it under 50% of your total income. If it’s over, look for ways to reduce expenses, like opting for a cheaper apartment or a more affordable phone plan.
Step 3: Build an Emergency Fund
Imagine having six months’ worth of expenses saved in your bank account. The peace of mind and freedom this brings is invaluable. This is why an emergency fund is crucial. Life is unpredictable, and Murphy’s Law states that anything that can go wrong will go wrong. Instead of resorting to credit cards or loans in a crisis, you’ll have a financial cushion.
Aim to save enough to cover six months of your financial baseline. If your baseline is $3,000 a month, save $18,000. Remember, emergencies don’t include vacations or impulse buys—they’re for real crises, like job loss or major car repairs.
Step 4: Pay Off High-Interest Debt
Debt can strangle your monthly income, making it hard to save or invest. Forget cutting back on avocado toast; paying off high-interest debt will save you thousands. If you have a credit card balance of $6,500 with a 19.5% interest rate and only make minimum payments, it will take eight years and an additional $6,000 in interest to pay it off.
Two strategies to pay off debt are the avalanche method (tackling high-interest debt first) and the snowball method (paying off the smallest debts first to build momentum). Use whichever method motivates you most. When I got serious about paying off my debt, I used a spreadsheet to track each debt and payment, visualizing my progress until everything was paid off.
Step 5: Start Investing
Investing doesn’t have to be complicated or overwhelming. The basics are simple and can lead to substantial long-term gains. Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn’t pays it.”
Over time, the stock market averages a 10% annual return, meaning your money can double every 10 years. If you invest $6,000 annually from age 25 to 65, you could end up with over $2.7 million. Compare that to $240,000 if you kept your money under a mattress.
Step 6: Prioritize Your Investment Accounts
Knowing which investment accounts to prioritize can maximize your returns and minimize taxes. Start with your 401(k) if your employer offers matching contributions—this is essentially free money. Next, contribute to a Roth IRA, where your earnings grow tax-free. Finally, invest in a taxable brokerage account for additional savings.
Step 7: Automate Your Finances
Manual management of finances can lead to decision fatigue, where the quality of your decisions deteriorates over time. Automate your finances to save time and reduce stress. Set up automatic transfers to separate your paycheck into spending and savings accounts. Allocate funds for fixed expenses and non-essentials, and automatically transfer leftovers to your savings.
Step 8: Reevaluate Your Time and Money
Time is your most valuable resource. Consider the opportunity cost of your activities. If you can earn more from a side hustle than it costs to hire someone to clean your house, it’s worth outsourcing. Write down tasks you dislike and calculate if outsourcing them makes financial sense.
Conclusion
Following these steps can transform your financial life, but remember, it’s a journey. Sometimes, despite your best efforts, you may still feel financially insecure. It requires patience and discipline but following a payday routine will help you become more financially successful.
Take control of your finances today, and enjoy the peace of mind that comes with financial freedom.