When a paycheck makes its way into your hand, it’s an exciting time. But then, the inevitable question hits: “How should I spend this money?”
It’s important to prioritize the spending of your income to ensure long-term financial success. Not having a plan is not an option for those who want to pay down debt, build an emergency fund, and build wealth.
In working with hundreds of families over the last decade, one common trait that the most financially successful families had was that they understood and implemented a sound spending plan. Spending is one side of the equation that really does matter – just like the income side.
Where Your Money Should Go
Here are some easy-to-follow prioritized steps for spending your paychecks wisely . . . .
1. Tithe or give to charity off the top.
Giving not only helps the local church or a charitable cause, but it changes our hearts. The act of giving puts money in perspective and moves us to trust in the Lord with the resources that have been entrusted to us!
Don’t skip this important step. Make giving the first thing you do with your paychecks. God designed us to be funnels, not buckets; we’re to allow money to flow through our lives, not horde it all for ourselves.
2. Fund your short-term emergency fund with $1,000 in cash.
As explained in the Foundation Phase, it’s crucial to make sure you have $1,000 in cold, hard cash saved up at home. Emergencies happen, and having $1,000 in cash will help when a time of crisis hits.
Remember, this $1,000 in cash is only a starter emergency fund and will be revisited later once you’ve completed a few more steps.
3. Pay your keep-me-alive-and-off-the-streets expenses.
These expenses are also called mandatory or necessary expenses. These are your needs, not your wants!
Such needs include but are not necessarily limited to:
These five expenses are not only worthwhile, but they are arguably required for health, safety, and productivity.
4. Pay the premiums on your insurance policies.
Insurance protects you from expenses that you wouldn’t otherwise be able to afford. Should something catastrophic occur, you’re going to need insurance to keep you from bankruptcy.
Here are some common types of insurance to consider:
Some people waste money on unnecessary insurance policies while others are taking incredibly high risks by not having the minimum coverage needed. A good independent insurance agent can help you with this or you can contact us for a review.
5. Pay the minimum debt payments on all debts.
Look at the minimum you have to be paying on all of your current debts to remain in good standing. This includes all debts, including credit card debt, student loans, auto loans, personal loans, mortgages, and any other debt you might have. Pay these minimum amounts!
Soon, you will be putting more money toward your debt. Just make sure that you are at least paying the minimum payments at this point.
6. Apply the 70/30 rule to the remaining funds.
The 70/30 rule is simple. The idea is that you need to take 70% of the remaining funds from your paycheck and apply it to your plan.
If you’re in the Foundation Phase, for example, you would use that 70% to pay down your smallest debt until it is gone. Then, you would work your way through the rest of your debts – smallest to largest – until you have paid off all your non-mortgage consumer debt.
After this is done, you should use the remaining 70% to fund your emergency fund between three to six months of living expenses in a high-yield savings account.
Where does the 30% come in? Great question. The remaining 30% should go toward your lifestyle. Yes, you need to live a little and put money toward today. You never know when the Lord will call you home, and it’s okay to enjoy some of the money you earn!
7. Apply the 70/30 rule in a new way to accumulate wealth.
If you’ve made it this far, you’re doing fantastically! Look at what you’ve accomplished so far: you’ve given off the top, accounted for all your basic needs, put in place proper insurance, paid off your debt and built a solid emergency fund.
Once you’ve reached these goals, now it’s time to apply the 70/30 rule in a new way to accumulate wealth.
Too many people put 100% of their savings toward retirement accounts. Don’t do this. The last thing you want to do is become IRA-rich yet cash-poor. You’ll find yourself without money in non-retirement accounts that you could have used to finish up that construction project or pay for your child’s wedding. As a result, you might be tempted to withdraw money from your retirement accounts too early which may result in unnecessary penalties and taxes.
Instead, put 70% of your savings toward retirement accounts and the other 30% toward taxable, non-retirement accounts. That way, if you need money for a big expense, you’ll have it readily available and won’t have to dip into your retirement accounts. For example, if you need to buy a car, you’ll have the money saved up instead of having to go get a loan. Too many people fall into the trap of getting loans for vehicles, which prevents them from moving to the next phase in their plan.
Try using cash for discretionary expenses.
My wife and I take a certain amount of cash out of the bank every other week for discretionary expenses. The nice thing about this is that it allows us to stay within budget without having to record a plethora of transactions.
We include grocery money in this cash allotment. Even though groceries could be considered a necessary expense, it is often times an expense that quickly hops over into the realm of the discretionary. Cookies and ice cream certainly aren’t the best choices for sustaining life and really aren’t necessary (well, sometimes). Spending cash for our groceries keeps our spending on food at appropriate levels.
Use credit cards and bill pay for the regular expenses.
We use credit cards for gas and a few other expenses like kids’ activities and gym memberships. Keep in mind, though, we pay the credit cards off monthly and recommend you do the same. In addition, we use bill pay through our bank which allows us to automate those bills that are fixed.
These practices help save us some time while keeping our money under control.
Use the 70/30 rule on newfound income as well.
Birthdays. Bonuses. Graduation gifts.
Wherever you come across newfound money, don’t go and spend it outside of your budget. Instead, put 70% toward your plan and 30% toward your lifestyle. You can use these bursts of income to further your financial goals while still having a little fun!
Following these recommendations on how to spend your paychecks wisely will propel you toward financial success. Take some time to fully grasp these concepts and actually start implementing them in your life.
If you’re married, sit down with your spouse and dream together about what it would be like to become debt-free. Imagine what it would feel like to have a healthy emergency fund. Think about all the things you could be doing without your financial burdens.
Then, act! You’ll be so glad you did.
How do you spend your paychecks now? What do you need to change after reading this article? Be sure to leave a comment and your questions as well!
River La Belle says
As an insurance agent, it is great to see my work validated by your Step #4.
Also, Step #7 is novel! I love it.
Lastly, to answer your question, what I’ll change is using cash for my discretionary purchases. It’s always been a burden to me to record all the small spending I do, so this will be very helpful to me.