It’s Friday just got paid new shoes new restaurant movies and it’s gone. When it comes to Payday it’s hard to know the best things to do with your money so today I’m going through step by step the eight things you need to do with your money as soon as you get paid.
1. Find Your Financial Baseline
The first and most important thing you need to do is find your financial Baseline. When it comes to personal finance most people feel like it’s too much work but that’s why most people struggle. 64% of Americans live paycheck to paycheck because they commit one of the worst financial mistakes in psychology they call it mental accounting. Basically it’s when you mentally categorize your money instead of physically writing it down.
In May, you might receive a tax refund from the IRS and you mentally categorize this as extra fund money. You get excited and start spending it: a new PS5, a new TV, or Mr. Magic Lamp. The problem is just money is the same as your regular income, you just pay too much in taxes and the IRS is just returning it.
2. Track Your Monthly Expenses
The good news is the solution is simple: open up a spreadsheet and take account of all your monthly expenses—rent, internet, pineapple pizza, floss. Putting all this together in a Google sheet was a great way for me to discover how much I needed to survive every month with my current lifestyle.
3. Cut Back on Non-Essential Expenses
Now for the real work: delete the expense items that aren’t your core essentials. Yeah, that means Netflix, staplers, your Candy Crush subscription. Once you’ve done that, sign up for my free Weekly Newsletter to build a wealthier and healthier life (link below).
4. Building Your Emergency Fund
After a grueling self-reflection moment, you should end up with just a few core expenses: first housing, which could be rent or mortgage (generally under 30% of your income), second groceries and food (about 10% of your income), and third insurance and utilities like internet, cell phone, and electricity (about 10%). This number now becomes your financial baseline, the absolute bare minimum you need to survive each month.
Aim to keep your financial baseline under 50% of your total income. If it’s over, look for expenses that you can easily swap for cheaper ones. For example, do you really need that apartment with an indoor pool? Or a phone plan that has satellite coverage?
5. Pay Off High Interest Debts
77% of American adults are in debt, and this is something we’ve just all accepted as the norm. One of the worst things about debt is that it strangles your monthly income. Paying off your high-interest debt will save you thousands in interest and fees. If you have a credit card balance of $6,500 with an interest rate of 19.5%, and you decide to only pay the minimum payment of $130 per month, it’ll take you eight years to pay it all off with an additional $6,000 in interest.
There are two ways to pay off high-interest debt early: the Avalanche method (tackle the highest interest rate first) or the Snowball method (focus on the smallest loan amount first). The Avalanche method is the most efficient, while the Snowball method builds momentum.
6. Start Investing
When it comes to investing, most people think of flashing screens, day trading, and aggressive shouting. But investing doesn’t have to be overwhelming. The basics are easy. Compound interest, for example, is the eighth wonder of the world. If you invest $6,000 each year from 25 to 65 years old with an annual return of 10%, you’ll end up with a total of over $2.7 billion dollars.
7. Prioritize Retirement Accounts
For most people, the first step is to put money into your 401(k), a workplace retirement plan that offers matching contributions. If your 401(k) plan offers a match, contribute enough to meet the matching amounts—essentially free money. After you max out your employer match, consider contributing to a Roth IRA. With a Roth IRA, you don’t have to pay taxes on any of the earnings in this account, and you can withdraw your contributions at any time.
8. Time is Your Most Valuable Resource
When it comes to life, time is the most valuable resource. It’s the only thing we can’t buy more of. In economics, this is called opportunity cost. The time you spend doing something is time not spent on something else. If you can make $90 in three hours by working on a side hustle, but you spend that time doing something else, you might want to reconsider your priorities.
9. Automate Your Finances
The most important step of all is to automate your finances. When you automate your finances, you don’t need to track anything or think twice about paying your bills or saving. Set up automatic transfers for your paycheck into both your spending account and savings account. With this system, you’ll never have to worry about missing payments or forgetting to save.
By automating everything, you’ll save time, reduce decision fatigue, and ensure your money is working for you without constant manual effort.
