What To Do When You Get Paid - A Step by Step Guide
How to Stop Living Paycheck to Paycheck
Listen up, America: you have a savings problem. Nearly half of the country is living paycheck-to-paycheck, and that's not a BS straw-man argument I just pulled out of my ass. According to the Motley Fool, 47% of Americans cannot currently handle an unexpected $500 emergency without going into debt.
Believe it or not, this is actually an improvement. Prior to the world stopping in 2020 due to the pandemic, Americans were in a much worse position when it came to saving money. According to TIME, the average savings rate for the average apple pie-loving, KFC eating American was 12.7% in March of 2020. April of 2021? That number skyrocketed to 32.7%, which is great!
However, these people didn't make that trend a full-on habit. Savings rates crashed back down as the country opened back up, thanks to pent-up demand for going out to eat, traveling as much as possible and spending money buying that girl at the bar shots that won't sleep with you dude just stop.
So how do we get back to the sky-high savings rates experienced during the pandemic, while also being able to enjoy life? Believe it or not, people have been doing this for hundreds of years, and you can too! Here's the game plan.
1. Pay Yourself First
"Oh boy, another Warren Buffett quote" I hear you sigh as you swipe to get rid of this tab and never come back to this site. Look, I get it. This site is aimed at millennials and Gen Zers, and to us Buffett seems like the old guy at the shoe store that hangs out trolling for ladies, but he belongs on the Mount Rushmore of investing. Not only that, but he has some pretty decent life advice, one of which is: PAY YOURSELF FIRST. But what does that mean?
Do I Pay Off Debt? Or Do I Save Money?
The answer here is: both. I know that seems like a cop-out, but it'll make more sense when we start chatting budgets. Just know that paying yourself first can actually involve both saving and debt paydown, and at a later point, investing.
What you need to do first is build up a small cushion. Just something that's going to help you sleep better at night. Is that $500? $1,000? Three months salary? Only you can answer that. But each time you get a paycheck, try to put a little bit of money in a separate savings account that is meant to cover emergencies. That little bit of extra cash is going to help you sleep better, lower your stress and generally make life that little bit better.
With the extra carveout in this section, pay down that high-interest debt! But how do you know if a debt is high-interest? Well, there's a good rule of thumb: pay any credit cards as quickly as you can. Credit cards are like :The Upside Down: in Stranger Things when it comes to compound interest: normal compound interest is heaven, while compound interest working against you is hell.
Here's what's called "The Rule of 7:" Pay off any debt that has an interest rate of over 7% as quickly as you can. For anything less than 7% interest, pay off the minimums each month and invest the rest. Why? Because 7% is the average annual return of the S&P 500, and this allows you to maximize your long-term financial potential.
Want to learn more about The Rule of 7? Check out my piece on paying off your mortgage!
Related: Stop Paying Your Mortgage Off Early
2. Outline Where Your Money Is Going (Budget!)
This part sucks initially, but might be the most helpful part of this whole fucking article. Get a budget. Don't bitch at me - you need a budget. A budget will not only help you get a better idea of what your monthly expenses are, but it also allows you to plug the spending holes you have every month.
Are you one of those people that goes to Starbucks every Friday but can't figure out why American Express has sent Dog The Bounty Hunter to your house to collect payment? Welcome to a budget! Do you spend every weekend in cute AirBnB's so you can stunt on them ho's on Instagram? You need a budget. Do you buy jackets for your dog? You need a budget, and I'm calling the police.
What's the Easiest Way to Budget?
Luckily for you, there are TONS of easy ways to budget now. We live in the age of technology, which means you can let technology do the work for you! Most banking apps will now automatically track your spending so you don't have to go line-by-line in your transaction history to figure out what you spent at Whole Foods and what you spent at that ATM at Magic City that charged you a $12 convenience fee. But most banking apps won't actually do the budgeting for you in order to maximize your financial flexing, so what are you to do?
Here's where the 50/30/20 budget comes in. This is BY FAR the easiest and most effective budget out there. Think of it like a diet where you get to eat ice cream once a week but still lose weight. Sure, keto is cool, but you can only eat so many bacon-wrapped cheeseburgers (without the bun!) before you start to question the effectiveness.
The 50/30/20 budget essentially follows these rules:
50% of your cash goes to needs (mortgage/rent, food, utilities, internet, etc)
30% of your cash goes to wants (dining out, secret second family, travel, blow)
20% of your cash goes to yourself (saving, investing, paying down debt)
For a more in-depth analysis of the 50/30/20 budget, check out my piece!
3. Don't Blow Your Budget
Alright, you're onto step three. You've made a payment to Visa, you've saved a little bit in your emergency fund and you've identified how much you need to save for those Gucci slides. Now what?
Now it's time to get consistent. There's a reason I broke this down into steps: because it's easier to follow, and that's the whole point. Consistency and repeatability is key here, because doing this for one month won't really help you that much. Habits are built over time, and this habit has the awesome side effect of giving you financial flexibility.
The best way to do this is to stay on budget, and the best way to stay on budget is to automate it. There are a million apps available to do this for you, but I have a favorite: Albert.
Albert is a fintech startup that's been around for a couple of years and has helped me substantially. It's kept me on track with my budget, alerting me whenever I get a little too spend crazy on travel or women of the night. It also has a savings feature where I can enter a goal like "pay back my bookie" and an amount that I'll need, and it spits out an estimate for when I will have that money saved up. But how does it know...?
4. Start Surprise Savings
My favorite feature of Albert? Surprise savings. In the interest of balance, this is also my favorite feature of my joint savings account with my wife at Ally Bank, so you have options.
Effectively, surprise savings are small transfers to a savings account that the bank thinks you can afford based on its analysis of your spending habits. My Albert app has literally saved me nearly $6,000 in the last 18 months I've been using it, all in surprise savings transfers that I didn't realize I could afford. This is a phenomenal way to pump up your emergency savings account, or to save for that big-ticket item like a vacation or a down-payment for a home.
5. Get Invested
From people who don't invest, I hear three main arguments:
I don't get it and at this point, I'm too afraid to ask
It's rigged for rich people
I don't have enough money
Let's go point by point. If you don't understand it, I highly recommend clicking the homepage of this site and just reading backwards. I have over 100 articles that should help you out.
Related: New to Investing? Start Here.
If you think it's rigged, that's actually not totally wrong. Between broker-dealer mandated shut-downs, hedge fund nonsense, insider trading and dark pools, there are a lot of factors that affect the little guy. However, there is SUBSTANTIAL money to be made in the markets, so the best way to learn, is to do. Go out and get some skin in the game. Throw a few dollars in your Robinhood account and learn about different companies! Check out my "Stocks to Invest In" tab on this site where I dive into the financials of different companies and explain their business models. Try it out for yourself!
Related: Stocks to Invest In
The last point is: I don't have enough money. Well, you're on step five of this list and you've been following the steps before, right? Sooooooooo...welcome to the investing club!
6. Build On Your Momentum
Like I mentioned earlier, doing all of this for one month is pretty much meaningless. It's like quitting smoking for a day, then hammering the no-filters for the following 24 hours until you're "ready for the day."
Doing this day over day, week over week and month over month is where the real power is. Seeing your savings account increase by a few dollars a week, a few hundred dollars a month and maybe even a few thousand dollars per year is a beautiful thing. Seeing your investments increase over time, even paying you dividends just to hold them, is the way to see true generational wealth get created. And seeing your credit card debt decline day over day is a feeling I honestly can't describe.
Follow these steps, and you'll be well on your way to getting out of living paycheck to paycheck, and on your way to being one of those "hustle harder" guys on Instagram. Happy saving!
Like this piece? Check out the rest of my site for more. Thanks for reading!