This is the first article in a multi-part series on how to manage your finances so that you can begin generating income and, hopefully, quit your job one day. In part two, we discuss how to set up your checking account so you can manage your everyday expenses.
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Use your paycheck wisely
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Every working professional has one event that they don’t need their calendar to remember: payday. Whether you get paid monthly, bi-monthly, or for those lucky few, every week, there’s no doubt that you know exactly when all of your hard work is going to pay off, literally. Chances are, you’ve been looking forward to it since your last paycheck, and as the balance in your checking account gets closer and closer to zero, you’re probably jumping at the opportunity to log on to your bank’s website and see all of that just sitting there, waiting for you to spend it.
Hopefully, you’ll funnel some of it into a savings account. You may set some aside for rent and utilities, maybe even put some away into your 401(k) or other long term investment account. Chances are you’ll use the rest of it on random purchases throughout the month. But as the end of the month gets closer, your account dwindles back down to zero and the cycle starts all over again.
For a while, this works out just fine. But then, one day, something happens. Your car breaks down. You need to pay for a big purchase. You have to pay a friend back. What do you do then?
Your checking account doesn’t have enough money in it, and your next paycheck doesn’t come in for another week. If you’re lucky, you may be able to borrow money from your already debt-laden credit card, or maybe even a friend or your parents. Neither of these options are any good.
Take control
Image from Danilo Rizzuti
Does it surprise you to know that nearly half of all Americans live paycheck-to-paycheck? It’s even worse for people under the age of 35. One study from Metlife, several years ago, showed that about 59% of all workers between 20 and 30 have no savings and need to rely on their monthly paycheck to make ends meet. That’s a shame, because starting to save and invest in the early 20′s and 30′s is a great way to build up a huge cash balance for later in your life.
So how do you get control and build up your nest-egg?
Traditional wisdom says to “pay yourself first.” For those that haven’t heard this term before, it means that before you spend money on any bills, utilities, clothes, electronics, or other expenses, you should set aside a certain amount of your paycheck to go into a pre-planned savings, checking, or investment account.
Now, let’s talk about how to plan for that unexpected expense by paying yourself first.
