A Personal Finance Coach On How Much Of Your Paycheck You Should Spend vs. Save
Sometimes it can be difficult to figure out the best way to make your monthly paycheck go the distance, yet when you're trying to mindfully manage your money this is one of the most important questions you an ask yourself. As a personal financial coach, I've seen that many of my clients have trouble divvying these up so that they end each month in the black (on budget) and not in the red (ouch, overbudget).
The key to paychecks: Do the hard thing first.
You've probably heard productivity experts suggest that the key to success is "eating the frog" each morning, which essentially means doing the hardest thing on your to-do list first to get it off your plate and help the rest of your day progress more smoothly. Well that doesn't apply just to your to-do list; it can also apply to your wallet.
We've all been there: You get your paycheck (cha-ching!) and all of a sudden, your spending trigger finger gets itchy. "First round of kombucha is on me!" or "Tickets to Tulum, finally!"...right?
I'm not saying to make these things off-limits entirely, but starting the month off with them isn't the best idea. In the end, it means you're more likely to dip into your savings to make sure you can cover your monthly bills.
So when you get your paycheck, start by eating the frog. That means pay your bills first. This will give you a better idea of what you can actually afford and what you can't. Plus, it will ensure that you're not going to submit a late payment (or miss a payment), which will help keep your credit score from being dinged.
It sounds obvious, but many people don't do it! The best way to stay on top of it is to set up automatic monthly payments from a deposit account. It adds discipline to the process without you having to think about it.
From there, think of the 70-30 rule.
These bills play into the 70 percent of your monthly paycheck that should be going toward your "essentials"—all those living expenses, such as your mortgage/rent, utilities, insurance, food, and other literal needs (soap! toilet paper!). I also recommend putting 5 percent of this pool into your emergency fund each month, in case your car dies or laptop refuses to start.
Then, break it down further into 15-15.
Fifteen percent of your paycheck should be going to your "endgame," aka things for your future like savings accounts, investment accounts, and retirement accounts. Don't frame it as a burden to have a 15 percent "bill" every month. Think of the endgame as being the lovely stuff you get down the line from this 15 percent. I promise you that "future you" will thank "present you" for it.
Now comes the fun part, because building some wiggle room into your budget is a must if you want to stay on track. Allowing yourself indulgences here is essential to keeping your budget on track so that you don't get "money hangry" and end up splurging on something that'll leave your wallet hurting.
The remaining 15 percent of that monthly paycheck is for the "extras," meaning, whatever does it for you. First round on you at happy hour? That comes outta this 15 percent. Those concert tickets you've been eyeing? That also comes out of this 15 percent. You can spend this money freely and confidently, knowing that you're not dipping into any other categories to drum it up.
By doing the hard thing first and paying your bills before you start spending on additional shopping, dining out, or entertainment, you're ensuring that bills are paid on time, and you're not dipping into your savings to make sure your insurance premium is paid.
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