Starting a career has many benefits, such as the satisfaction of a job well done, the respect of your peers, and the chance to grow into situations that are more difficult. But getting a regular paycheck is one of the best things about having a job. Your salary is a direct sign of how valuable you are to the company you work for. But having a steady income makes you wonder what to do with your money. It’s always a good idea to split your salary into money you spend now and money you save for the future, but it takes some careful thought to decide how to do this.
Look at the “Rules of Thumb.”
Rules of thumb are often used by financial advisors and advice sites to get people to think about their budget options. For example, the 30-30-30-10 budget from the Economic Times suggests setting aside 30 percent of your income for things like groceries that you need every day, 30 percent for regular payments like rent and student loans, 30 percent for savings, and 10 percent for fun.
In the same way, NerdWallet likes the 50/30/20 rule, which says that you should spend 50 percent of your take-home pay on your essential needs, 30 percent on your less important wants, and the remaining 20 percent on savings and paying off debt.
These rules can be a good place to start. But everyone’s financial situation is different, and how you spend your money depends a lot on your current and future responsibilities and priorities for yourself and your family.
Learn how to keep track of your regular costs
Most people have a set of regular expenses that they usually pay for every month. These are things like rent or mortgage payments, loan payments, insurance premiums, and other costs that are predictable and, for the most part, fixed amounts.
These are the costs you have to pay. That is, a certain amount of your pay goes towards paying off these amounts every month. Make sure you have enough money set aside to pay these costs every month, and don’t forget about costs like car insurance that are usually due once or twice a year.
Even though most people think of these amounts as “fixed,” keep in mind that there are ways to cut costs in these categories. For example, you can lower your rent by getting a flatmate, and you can lower your insurance costs by looking for a cheaper policy. Also, pay close attention to the regular things that are taken out of your paycheck, such as taxes, Social Security, and fees. Even though many of these costs are fixed, some may be changeable, giving you the chance to lower deductions and keep more of what you earn.
By refinancing, you might be able to lower your monthly loan payments. But be careful with this choice. A refinance or loan consolidation offer could lower your monthly payments, but it could also lengthen the time you have to pay back the loan, which would make you pay more in the long run.
Check out how much you spend every day.
The money you spend every day on things like your morning coffee, lunch and snacks, a sudden splurge on a new jumper or pair of shoes, grocery shopping, getting your nails done, birthday gifts and a thousand other things add up to a big chunk of your overall costs.
Look closely at your credit card bills, shopping receipts, online purchases, cash outlays, and other areas of spending to get a good idea of where your money is going. Over the course of a year, even small spending habits can add up to a lot of money. If you spend $4 a day on coffee, that’s well over $1,000 a year that you don’t have to spend. Changing the way you spend money every day may be the easiest way to cut costs and have more money left over at the end of the month for things like savings and investments.
Don’t forget to account for occasional, but sometimes expensive, expenses that don’t happen every day. A sudden trip to the dentist for a chipped tooth, the sudden news that your best friend is getting married, or the need to visit a sick relative can all add up to a lot of money.
Once you know how you spend your money, you can set aside a certain amount of each paycheck to cover each type of expense.
How to Save and Invest
Your rent and other regular bills, as well as the things you buy every day, will likely take up a big chunk of your take-home pay. But hopefully, you’ll have some money left over at the end of the month. This is money you can put in a pot for saving and investing.
A savings and checking account is a common and easy way to keep your extra cash safe and use it to pay bills. It makes sense to keep a fair amount of money in your accounts as a buffer in case you have to pay for something unexpected. For example, Ally Bank suggests keeping three to six months’ worth of regular expenses in a bank account so that you have enough cash on hand to handle most emergencies. The older you are, the more money you may need on hand, since families that are growing tend to have more needs and costs. But the “right” amount of money to keep in savings and checking depends on your financial situation and how much risk you are willing to take.
If you’re happy with how much you have saved for regular expenses, you can put any extra money towards investments like buying stocks and bonds, getting into the real estate market, buying a long-term certificate of deposit, or even looking into more risky options like Bitcoin and other cybercurrencies. Keep in mind, though, that investment money is usually money that is easy to lose. Companies do go bankrupt, and their stock shares lose all value. Bonds sometimes go into default, and cybercurrencies can crash and burn in a very short amount of time. Never put in more money than you can afford to lose.
Plan for your old age
When young people first start working, it can be hard for them to think about the fact that they will get older. Old enough to retire someday, which means to stop getting a regular paycheck. The sooner you start making plans for this possibility, the safer your retirement will be.
Many workplaces make it easy to plan by giving options for retirement plans that are paid for by regular paycheck deductions. Every time you get paid, some of your money goes into a savings account or other long-term investment. Many plans offer a wide range of ways to invest, from safe government bonds to high-risk but potentially high-return equity investments.
Consider putting in the most you can to these plans so that your nest egg for retirement grows quickly. Check the details of the plan at your workplace, as many employers will add to your savings as well. The more you put in, the more your employer will add. It can be a great way to increase the benefits you get from your employer as a whole.