What to do when you get paid?
What to do when you get paid? We all look forward to getting paid. Indeed there is no greater joy for someone with a job than the day their bank gets a new deposit from their employer. But just because you have money in the bank doesn’t mean you instinctively know how to spend it.
In fact, most people are so accustomed to living paycheck-to-paycheck that they’ve gotten into many bad habits when the money rolls in. So in this article, we’re going to talk about the specific things you should do when you get paid to make sure that your money is being used as effectively and efficiently as possible to ensure long term financial growth. Are you ready? Let’s get into it!
Okay, so one of the first things to do when you get paid, is to Organize your funds into various “buckets” of your financial responsibilities. One method to do it is through the percentage model. If you’re not aware of this model, it is essentially a breakdown of how your monthly earnings should be distributed.
The percentage model is divided into four categories: savings, variable expenses, fixed expenses, and housing.To properly use this financial management tool, you must first realize which expenses should be included in each of the four categories. So, let’s begin with savings.
Savings or investment accounts, debt repayments, and emergency funds fall under the savings category. This category accounts for the smallest percentage of your total income. However, it is by far the most significant. The last three categories demand that you spend money on products that will keep you afloat daily.
Money put into your savings category, on the other hand, helps you improve your financial status by lowering interest payments or growing your portfolio.The variable expenses are the next area, which might include anything from meals and beverages to gas and clothing.
Many of us spend a significant amount of money on non-essential products, and this is the category responsible for excessive spending. It’s critical to keep to the spending budget you’ve established for yourself. Your fixed expenses, which include things like your car payment, utility bill, and life insurance, fall into the third category.
These are the types of expenses that don’t vary significantly monthly. This aids in keeping the money spent in this category under control. Housing is the final category in our percentage model.
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The variable expenses are the next area, which might include anything from meals and beverages to gas and clothing. Many of us spend a significant amount of money on non-essential products, and this is the category responsible for excessive spending. It’s critical to keep to the spending budget you’ve established for yourself.
Your fixed expenses, which include things like your car payment, utility bill, and life insurance, fall into the third category. These are the types of expenses that don’t vary significantly monthly. This aids in keeping the money spent in this category under control. Housing is the final category in our percentage model.
The majority of people incur this expense in the form of a mortgage. However, many people take on a more expensive apartment or a larger property than they require, leaving them cash-strapped while trying to make monthly payments. According to research, the average size of a new home is now two thousand six hundred eighty-seven square feet.
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On the other hand, the average household size, or the number of people living in it, has declined from three point zero one individuals per household forty years ago to two point five-four today. All of this indicates that a lot of money is being wasted.
Now that you understand the four categories of the percentage model, it is time to determine how much of your monthly after-tax income to allocate to each category.As you received your income, a good general starting point is to have fifteen percent allocated to savings, thirty percent to variable costs, thirty percent to fixed expenses, and twenty-five to housing.
These percentages may change over time based on your financial goals.The percentage model is a dependable technique to ensure that you make monthly progress toward your financial goals. However, it takes a lot of effort on your part which is why there’s a financial system to use the percentage model efficiently.
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Three methods to make automating financial management easy:
Here are three methods to make automating financial management easy. Step one is to create the appropriate accounts.
Automating your financial management process
The correct accounts are the first step in automating your financial management process. Most people will utilize a single checking or savings account, but this will just add to the monthly effort required to make the strategy work. You should open an emergency fund, a debt payback account, and an investing account in addition to the standard checking and savings accounts where you save money. This will ensure that all aspects of your savings category are covered.
Setting up automated deductions
Setting up automated deductions is number two. Eighty-two percent of workers in the United States are paid via direct deposit, and if you’re one of them, you can benefit from automated deductions. These deductions allow you to split up your paycheck and send pieces of it to each of your accounts.
Once you start using this strategy in your financial management plan, you’ll see that you’ll need to reallocate your income over time to make the most of your money. If you set up the deduction percentage correctly, you may identify exactly how much you want to save and invest.
Adopting automated deductions relieves you of the need to continually think about your finances, allowing you to focus on other essential things, such as improving your ability to earn more money. So, if you want to streamline your process, be sure to use automated deductions.
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Automate bills and loan payments
Number three, automate bills and loan payments. Paying bills is a nuisance, and attempting to remember to pay them on time only adds to the misery. You should make use of automation to ensure that your variable and fixed housing bills are paid in full and on time. You can automate bill and loan payments in two ways.
The first option is to have creditors directly deduct the bill balance from your checking or savings account every month. Because you most likely already have one of these two accounts open, all it takes is a few phone calls to your service provider for withdrawals to begin. The second alternative is to open a separate bank account for bills only.
This method has both advantages and disadvantages. The advantage is that it makes evaluating bill payments easier. However, you could end up with additional banking fees. If the creditor attempts to process the payment and you have insufficient funds in that account, your bank will charge you fees.
This won’t happen if the deduction is made from your savings account since that is where a large portion of your free cash will be, but it is better to have a bill payment account to reduce risks. Put one to two times your average monthly spending amount into your bill payment account when you first open it.
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And make sure you’ve set up a regular paycheck deduction with your company to cover the withdrawals over time. Following the percentage model becomes a thousand times easier once you’ve completed these three steps, but there’s one additional factor to consider when maximizing the benefit.
Just because you’ve defined each category’s percentages, doesn’t mean they can’t be adjusted to accommodate your changing financial goals. There’s no need to spend as much money on a specific financial category if you can cut your monthly housing bills or eliminate your car payment. When in doubt, put as much money as possible into the savings category, which can be in the form of savings or investments.
The more money you can put into this category while reducing the other three, the better off you will be financially. So there you have it. Next time you get that magical feeling of being paid, keep the magic alive and use that money in the best way possible. There’s nothing stopping you from building a life of financial happiness and growth.
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