In the opinion of many, one of the greatest failures of today's public school system is that it allows students to graduate without requiring that they take a course in personal finance. In fact, a highly educated individual can get a high school and college diploma without ever receiving any formal training in how to save and spend the money they'll earn.
The result of this shortcoming is catastrophic. Otherwise educated individuals are graduating from college with tens of thousands of dollars in student loan debts, securing measly salaries in entry-level positions, and then racking up thousands of dollars in additional debt because they don't understand how to budget, save, and spend.
Something has to be done about it.
5 Tips to Managing Your Paycheck
If you don't have a game plan for how to utilize your monthly or bi-monthly paycheck, you probably aren't handling your money wisely. Here are five basic, yet valuable tips for managing your paycheck more effectively.
1. Automatically Deduct Contributions
The easiest way to protect your money from your own undisciplined behaviors is to automatically deduct as many contributions as you can. While your employer will likely go ahead and deduct your healthcare plan and taxes, you should also automate things like 401(k) contributions.
On a related note, make sure you're taking full advantage of employer match programs. If you're unfamiliar with match programs, these are plans where your employer will actually match your contributions to qualifying investment plans, dollar for dollar, up until a certain percentage. So if your employer matches the first 5 percent of your salary contributions, and 5 percent is $2,000, your employer will put in an additional $2,000. That's free money - take it!
2. Set Aside Money for Necessities
After all contributions are taken out, you're left with your monthly take-home pay. As soon as the check clears, set aside money for necessities. These are expenses that are necessary for living - such as housing (mortgage or rent), utility bills, car payments and gas, medication, groceries, etc. Put this money into a separate account and don't touch it under any other circumstances. It's best if you just go ahead and pay these expenses/debts immediately. This will remove the temptation of spending the funds on something else.
3. Put a Percentage into Savings
Once you know that you're going to survive until next month, you should stash away a percentage of what remains into various savings accounts. This includes other investment accounts - such as IRAs - college savings plans (if you have kids), CDs, mutual funds, health savings plans, and other interest-bearing accounts. It's also important to have what Dave Ramsey calls an emergency fund of three to six months of expenses set aside in a liquid account.
4. Budget the Rest for Discretionary Expenses
At this point, you've paid for critical expenses and set aside some money for the future. Now you can take what's leftover and use it for a discretionary fund. This is money that you can spend on miscellaneous expenses, including fun things like eating out, going to the movies, and shopping.
If you aren't earning a big paycheck right now, this discretionary fund may only be a couple hundred dollars per month. Understand that your income will go up over time; for now, don't dip into your savings accounts when the fund runs out. Stay disciplined and work on increasing your income so that you can have a bigger discretionary fund in the future.
5. Don't Feel Like You Have to Spend it All
The final tip is one that a lot of young professionals don't quite understand. Just because you have discretionary money left over at the end of the month, doesn't mean it needs to be spent. It's okay not to live paycheck to paycheck. Set that money aside and save it!
It's Time to Get Smart With Your Money
You have to get better at managing your money. You're either living paycheck to paycheck - in which case you can't afford to throw money away - or you're earning lots of money and blowing it on things that don't matter. Neither of these extremes is acceptable.
Take control of your money and learn how to handle your paycheck.