Want to boost your savings and make every paycheck count? As a budget-saver, I’ve spent years uncovering the most effective strategies to help you grow wealth.
In this article, you’ll read the top 8 money moves to make as soon as your paycheck hits your bank account. These proven tips will help you save more, invest wisely, and build a rock-solid financial foundation for long-term success.
Much of our information is based on the SEC’s saving and investing guide.
Find your financial baseline
The first step is to find your financial baseline by recording all your monthly expenses in a spreadsheet. This helps you discover how much you need to survive each month with your current lifestyle.
Removing non-essential expenses like Netflix, Staplers, and Candy Crush subscriptions. Yes, you want to look carefully because maybe your Netflix keeps your headspace clear so you can get to work every day. But you can do without many of these subscriptions. Once you do that, you can find your core expenses. Standard expenses usually include housing (rent or mortgage), groceries and food, insurance, and utilities.
Aim to keep your financial baseline under 50% of your total income.
Build an emergency fund
Having an emergency fund is crucial for financial stability and peace of mind. Please save up to six months’ worth of expenses in your bank account to cover unexpected costs like car accidents, job loss, or illness.
Mathematicians explain the importance of an emergency fund using Murphy’s law, which states that everything that can go wrong will go wrong. And it’s true, but you can outsmart Murphy with your new forward-thinking attitude.
A study found that 56% of Americans can’t afford an unexpected $1,000 expense, and 22% don’t have an emergency fund.
Pay off high-interest debt
Paying off high-interest debt is the next priority after building an emergency fund.
Note that an estimated 77% of American adults are in debt, which can strangle your monthly income and limit your ability to save and invest.
The best strategy for paying off high-interest debt early is either the avalanche method (tackling the highest-interest-rate loans first) or the snowball method (paying off the smallest loan amount first to build momentum and motivation).
Start investing
Investing is crucial for building long-term wealth. Please read and understand the power of compound interest.
The stock market returns about 10% a year over time. This means your money will double every ten years without you having to do anything.
If you invested $6,000 yearly from age 25 to 65 with an annual return of 10%, you would have a whopping over $2.7 million in your investment account.
But maybe you’re older. Oh well, live is what it is — still invest, still save — it helps.
Prioritize investment accounts
Knowing which investment account to prioritize will maximize your returns and minimize your taxes.
First contribute to your 401(k) account, or a workplace retirement plan that offers matching contributions (essentially free money).
After maxing out your employer match, contribute to a Roth IRA account. This will allow you to withdraw your contributions anytime without paying taxes on the earnings. Finally, invest in a regular taxable brokerage account.
See how money-safe you are by taking the FDIC’s game test.
Invest consistently
Do not fall for the common mistake of timing the market. Timing the marketing” involves stopping investing or pulling money out when the market is down and trying to get back in at the right time.
The best solution based on hard data and math is to consistently invest a fixed monthly amount, regardless of market fluctuations.
This dollar-cost averaging strategy minimizes the cost per share you pay for your stock over time.
Investing is also a part of the U.S. Government’s recommendation plan: MyMoney Five.
Buy back your time
Time is the most valuable resource, so please consider the opportunity cost of time.
Many could make more money working on a side hustle than the cost of hiring someone to do tasks you hate (like cleaning or mowing the lawn). It might be worth investing your time to focus on more profitable activities.
Automate your finances
The most important step is automating your finances to avoid decision fatigue and consistently pay bills, save, and invest. I recommend automatic transfers from your paycheck. Automate the money into a spending account (for fixed monthly bills and essential expenses) and a savings account (for emergency funds, debt repayment, investing, and opportunity costs).
Automating your finances can save time and headaches in the long run.
By following these eight steps:
- finding your financial baseline,
- building an emergency fund,
- paying off high-interest debt,
- investing consistently,
- prioritizing investment accounts,
- buying back your time,
- and automating your finances
you can make the most of your hard-earned money and build long-term wealth.
Frequently Asked Questions (FAQs)
Q: How much should be saved for an emergency fund?
A: Aim to save up to six months’ expenses in your emergency fund to cover unexpected costs like car accidents, job loss, or illness.
Q: What’s the best method for paying off high-interest debt?
A: The two most effective strategies for paying off high-interest debt are the avalanche method (tackling the highest-interest-rate loans first) and the snowball method (paying off the smallest loan amount first to build momentum and motivation).
Q: What’s the average annual return of the stock market?
A: Historically, the stock market returns about 10% per year on average. This means your money could double every ten years without additional contributions.
Q: Which investment accounts should I prioritize?
A: Start by contributing to your 401(k) account to take advantage of employer-matching contributions. Then, contribute to a Roth IRA account, which allows you to withdraw your contributions tax-free at any time. Finally, invest in a regular taxable brokerage account.
Q: What is dollar-cost averaging?
A: Dollar-cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market fluctuations. This approach minimizes the average cost per share of your investments over time.
Q: What does “buying back your time” mean?
A: Buying back your time involves outsourcing tasks you dislike or that take up too much of your time so that you can focus on more profitable or enjoyable activities. Consider the opportunity cost of your time when deciding whether to hire someone for specific tasks.
Q: How can I automate my finances?
A: Set up automatic transfers from your paycheck into a spending account for fixed monthly bills and essential expenses and a savings account for emergency funds, debt repayment, investing, and opportunity costs. This will help you consistently save and invest without making decisions every time you get paid.
