Firstly…CONGRATULATIONS! You have just received your first “proper” paycheck, whether you started in the world of work early or have just graduated from college / university.
What a great occasion! So, now that you have it, what will do be doing with all the money? What will your priorities be? Looking at this pot of wealth allows you to pick and choose the best places for it to go.
Side note: fellow blogger Chief Mom Officer recommends tracking your spending for a couple of months before creating a budget to actually see how much money you spend on different activities.
Your pot of wealth
For simplicity’s sake, and because my maths is not as strong as it used to be, lets say that you have a paycheck of 1000 – could be pounds, dollars, rand, euros, wherever you are in the world.
Then, lets say that out of this, 300 is rent. You might be someone who lives with their parents and pay less rent than market rates, or you may be living in a really high-cost area and a third of your paycheck goes on rent (which is an awful feeling seeing the money go straight out of your account!).
Now that the big chunk is out of the way, the 700 left is for you to spend as you wish! Experts such as Ramit Sethi, and Get Rich Slowly argue that automation is one of the best ways to save. 10% can then go straight out of your paycheck into investing .The automation part is particularly important as the aim is for you not to even think about it, it just happens and you can’t spend that money.
Make investing money a one-way valve: don’t take it out once it’s be automated in.
This could be a 401k, ISA, or any other saving service available. 10% is also the minimum – why not invest more and watch it grow? If you’re in the UK, I recommend Martin Lewis’ Money Saving Expert list of top ISAs, or if you are investing, I use Hargreaves Lansdown (let me know what broker you use in the comments!).
The importance of an emergency fund
Alongside investing is another similar segment to the pie chart: an emergency fund. Not long ago, one of my good friends almost lost her job in a redundancy sweep. She began to get very worried as she was living paycheck to paycheck and she had nothing which could keep her going without her job. The recommended number in your emergency savings account is 3 – 6 months of your expenditure. I would say as a garden variety figure, 5000 should be enough – but do vary it according to your needs. Once you have reached that figure, just let it sit. Don’t touch it unless there is an actual emergency!
Let’s assume that there is no emergency account, so I will allocate 50 to start it off with.:
Save to spend
Life never seems to be smooth sailing. What with the joys, like holidays to Europe, and the challenges, such as medical expenses, there always seems to be something new round the corner. Something I have found that really helps me manage these one-off expenses is creating a separate ‘save to spend’ account. Recently, something went wrong with my car right after going on holiday and I was so glad to have this account to take money out of rather than depleting my current account or ISA! I could not recommend it enough. In the UK, we are lucky enough to be able to have as many bank accounts as we want (no excuses then my fellow Britons!) – see how it works out in your home country.
…and the rest
Well, it’s up to you! I love food and a lot of my money seems to go on food or going out for a glass of wine with friends. There is also that added ‘guilt-free’ joy knowing that i have handled my money well and can still go out and have fun.
See what your spending is like, then adjust the figures above to match your needs. Have lots of money spare? Why not plug more into one pot that you prioritise that month. Student loans or other debt to pay off? It’s worth getting rid of that first because of the extortionate amount of interest usually put on those debts.
Does this method work for you? How do you split up your paycheck? Let me know in the comments!