Wondering about the optimal slice of your paycheck that should find its way into your savings?
The financial ebb and flow are familiar – a burst of spending early in the month, a gradual tightening of belts as the weeks unfold. So, if indeed you reached here looking for the order on how to allocate your paycheck for optimal savings, I get you!
You are not alone!
In fact, research highlights a spending peak in week one, a gradual tapering, and a resurgence in week four, all in anticipation of the next paycheck, whether it's a monthly, weekly, or fortnightly affair.
Breaking free from this financial cycle and constructing a sturdy financial foundation demands a strategic approach. Let's delve into the crucial question: How much of your paycheck should you save?
Step 1: Make Sure Your Income Hits Your Current Account
First things first, ensure your paycheck actually hits your current account, allowing you to allocate it optimally.
The simple act of witnessing a healthier balance in your current account reduces the likelihood of resorting to credit cards or payday loans, two financial traps with exorbitant interest rates reaching up to 1200%!
Payday loans are actually one of the most expensive loans that you could take on. Same with Credit Cards!
To combat impulsive spending, automate your debits and allocate your money to your different bills and savings pots as soon as income hits your account.
This tiny, proactive step curbs the temptation to rely on credit cards or payday loans, setting the stage for a more stable financial journey.
Step 2: Building Your Safety Net - Emergency Savings
Consider the security of having a financial cushion in the face of unexpected challenges. Emergency savings, designed to cover three to six months of essential living expenses, offer you peace of mind.
So this will only focus on your needs, not on your wants. When you focus on your needs, you'll see you need shelter, you need food, you probably need medical supplies. However, you probably don't need a take away or go to a restaurant three times a week. This is really covering for your basic expenses in the event that you lose your job or that salary stops coming in.
So, you want to start building this up to about three to six months of your living expenses. For most of us, 10,000 pounds is around the right ballpark for three to six months of living expenses.
But obviously this depends on your family size, on how many people are working within the family, how big a house you have, how many dependents you have. So, this, you have to personalize to yourself.
One of the things to note about emergency savings is that you want to keep that money liquid. You don't want to put it into stocks and shares because you are keeping this money in case something untoward was to happen. Say, you run into a medical expense. What you then don't want is to see that you have lost 50% of that money in the stock market. Therefore, this money really needs to be in a safe liquid savings account. So, any bank that provides a hassle-free high interest account is your best bet.
What you don't want to do is putting too much money into that emergency savings account because typically they'll be a lower interest rate, so inflation will start eating into your money.
Step 3: Conquer High-Interest Debt
Debt, especially high-interest debt like credit cards and payday loans, can hinder your financial progress. Tackling debt is fundamental to actually building a solid financial foundation. Prioritize paying off these debts before diving into investments.
Here, we are talking about high interest debt only, not your mortgage payments. So, your mortgage payments will likely be at an interest rate of 6% or lower. Some of you in this current market might have gotten a mortgage at even seven, 8%.
But what I'm really talking about are your payday loans or credit card loans that are typically charged at an interest over 20%. So, you want to pay off your highest interest debt first, and from there on the next most expensive loan. This is one way of doing it, and this is the most rational way of going about paying off your debt.
However, financial management is not only math, but there's a lot of mind to it, and if you want to get a real quick win, I would start with the smallest loan that you have. Go pay that off completely so that you have a win. You have showed yourself that, yes, you can do this, and then go off to the next highest interest rate loan and start paying that off.
By freeing yourself from the burden of high-interest payments, you lay the groundwork for a stronger financial future.
The next steps, i.e., four, five, and six need to happen simultaneously.
Step 4: Invest for Long-Term Growth
With your emergency fund established and debt managed, it's time to explore investments. Allocate a portion of your salary to investments that have the potential to grow over time.
Ideally, you want to invest this money into the stock market or into any other assets that your independent financial advisor might have advised you on. So, as a rule of thumb, you save and invest about 15 to 20% of your money each month.
Obviously, if you have different financial goals, for example, if you are pursuing something like the F.I.R.E. goal where you want to be financially independent as early as possible and retire early, the percentage savings could go up to 50, 60, even 70% in some cases. I'm not a proponent of the lean F.I.R.E. movement. More on that later. But what you really want to do is take this 15, 20, 50, how much ever percentage of your salary that you want to invest and put it towards an investment pot that will likely grow over the next seven to 10 years and even more because the magic of compound interest can make this extremely lucrative over longish periods of time.
So yes, start investing your money. My personal favorites are index funds. But I'm not a financial advisor. So, if you are you want to be doing your own research to suit your own circumstances. From the stock market to other assets recommended by financial advisors, these investments can significantly boost your wealth in the long run.
Step 5: Invest in Your Personal Growth
Recognize that your skills and abilities are your most valuable assets. If we can make ourselves worthy of a higher salary by investing in ourselves, that's the best investment because once you start earning more, you can always save more, invest more, and spend more.
So, for me, earning more becomes a no-brainer, and therefore anything that I can do to earn more money is an investment in myself. That I keep continuously doing every single month without fail.
There are several ways to invest in yourself
You could get a degree
You could go do an apprenticeship
You could go and attend some events, conferences
You can go do a webinar
You can go and do courses online
As is clear, there are so many ways of investing in yourself that could be appropriate for you in that situation.
An MBA is not always appropriate for you.
Another degree is not necessarily going to get you a higher salary.
A technical certification might not give you a higher salary.
You need to understand what is going to ultimately get you a higher salary. By enhancing your marketability, you increase your earning potential, thus creating a powerful financial impact.
One of the best ways, as I always say, to earn more money is to get a higher paying job. That's the most time efficient and effective way to get more money into your bank account.
In fact, if you are indeed looking for a job, I'm hosting a free workshop on the 1st of September, 2023, to help you with your job search. I'll be talking about the mistakes that I see candidates make through the job search process and how you can stand out and become a compelling candidate.
If you are interested, I will leave a link below.
If you go and sign yourself up, it's a free workshop that I'm hosting and we can get you started on that journey to more money and more financial abundance.
Step 6: Mindful Spending - Balance Needs and Wants
While addressing needs like housing and food is essential, responsible spending requires a balanced approach. You have to obviously spend a certain amount of money just to sustain yourself, that could be paying your mortgage bill, your rent, your grocery bills, your cleaning supplies etc. If you have family, maybe school fees, maybe medical expenses, whatever else that is absolutely necessary for you to be alive.
And then, there are wants. Of course, if you have not paid off your higher interest loans, like your credit card bills, like your payday loans, you should do that first before coming to this bucket of wants and wishes.
However, if you have done everything that I have mentioned till now, you can really focus on your wants. These wants could be something as simple as having takeout or one of my personal weird ones, buying incense sticks. Most people don't realize how much satisfaction I gain from buying an incense stick box for 10 pounds. But that gives me tremendous pleasure.
I'm sure you have some quirky things that you want to spend your money on, but you feel that the value per wear or the ROI on that spend is not as high, and this is where I personally think that frugality doesn't help. Once you have checked off everything else on the list, you have done everything that you needed to do, then, not spending money could actually be limiting for you to create more money. If you are not investing in yourself and spending money on yourself and building your skills up, you could see your salary tanking after a certain number of years.
Being able to survive on the basics is a huge advantage that a lot of people have and, if it was to come to that, I want every one of us to be able to be living on the bare minimum. However, what I would rather not have all of us do is survive on the basic necessities because when you are surviving on your basic necessities, you are, say for example, not spending money on these luxury incense sticks or some luxury fabric, then the workers who are making those incense sticks, making those fabric don't have a job, and you are not contributing to their livelihood. Your frugality might make it extremely difficult for some people to live.
However, I do want to emphasize on the fact that you want to be sustainable and conscious with your spending.
For example, if you are someone who loves fashion, I would really encourage you to consider whether you want to buy cheap goods or luxury goods. The people who are producing luxury goods are experts in their crafts. I've been studying fabric of Egypt and Bengal, and I'm just amazed by the scale some of these weavers. Like weavers, there are so many other workers and artisans who we could support by spending and tuning into our spending.
So, I'm all about spending more money because I believe that that money will ultimately come back to us. That how the economy works. Because if there's starvation in one part of the world, there's only so long that we will not be affected by it.
However, like I said, you don't want to be spending a ton of money on your wants without figuring out the rest of it. So, you do need to be conscious about whether you have:
Built up your emergency savings
Built up your investment pot
Invested time, money, and energy into building, your own skills up
Prioritize value over impulse, supporting businesses that align with your values. This conscious spending not only benefits you but also contributes to a healthier economy.
Step 7: Buy back your time
This is somewhat related to my earlier comment about when you spend money, you are actually enabling other people to live a decent livelihood.
For example, if you don't have time or you don't have the skill or the patience to do a certain activity,
you could hire help to do that for you.
One of my little luxuries is the money that I spend on my cleaner, and that gives them a decent way of earning their livelihood, along with that I am actually buying my time back. You could hire a chef, you could hire a gardener. There are a lot of possibilities here.
The point I'm trying to make is not only does it help the other people, it also helps you, because you can earn more money over time, but time, fortunately or unfortunately, will run out. There's only that much time you have in the day, in the month, in the year to get ahead on your goals.
So, if you have the disposable income to buy your time back, consider spending some money on that so that you are treating your time like currency.
One of my mentors once told me,
“When you value your time more than you value your money, you'll have plenty of both.”
This statement has rung true throughout my life. I have always been obsessed about how do I make this possible in the least amount of time. And when I have focused on time, typically I have had more money.
Time is a limited resource, and spending it wisely can significantly impact your life. When possible, delegate tasks that consume your time. This not only allows you to focus on more meaningful pursuits but also contributes to the livelihoods of others. Consider it an investment in both your personal well-being and the larger community.
Creating a solid financial foundation is a deliberate and thoughtful process that extends beyond monthly cycles. By strategically allocating your funds, establishing emergency savings, tackling high-interest debt, embracing investments, investing in yourself, practicing mindful spending, and valuing your time, you're setting yourself up for long-term financial empowerment. This journey requires a blend of discipline, foresight, and responsible decision-making, all aimed at building a prosperous and secure future. Remember, while financial strategies can be tailored to your unique circumstances, these steps provide a solid roadmap for financial success.