After working hard for an entire month, many look at spending after receiving the paycheck as emotional therapy. While there is nothing wrong with this, it is critical that you exercise caution and do not splurge on payday, as this may have an adverse effect on your savings and lives.
Payday rituals are vital whether your paychecks come in regular intervals or your income streams are less predictable.
So, how does one go about planning their paycheck?
Divide and conquer: When receiving a monthly paycheck after tax deductions, make a note of any differences from the previous one. Following that, the total amount must be divided into the following, with each receiving a sum of money that is appropriate for them.
Budget: It should be sufficient to cover all your expenses until your next paycheck. A small buffer amount must be set aside for unexpected expenses.
Savings: At least 10% of the total amount must be moved to savings, if possible. Usually, after creating a budget, this step determines how much money can be saved. The money is to be transferred to a savings account and not touched unless an emergency fund is required.
Debts or EMIs (if any): Set aside a certain amount to pay off debts or overpayments. If the sum is too large, another set of savings should be made.
Planning the budget: The budget would include all expenses up to and including the next paycheck. It’s a good idea to categorise it to keep a better track of the money flow. Such as, regular expenses like rent, bills, transportation, fuel, food, drinks, recreation, vacation, and so on. This will allow you to think and plan effectively, reduce impulsive spending and increase the satisfaction that comes with good planning.
Breaking down budgeting for us, Viral Bhatt, Founder, Money Mantra, says, “Controlling your expenses does not necessarily mean to forego your standard of living, though it may require you to sacrifice some of the unnecessary spending. Elizabeth Warren, a Harvard Professor, first established a principle known as 50, 30, 20. This principle simply bifurcates your post-tax income into needs, wants and savings in percentage of 50, 30 and 20 respectively. In this principle, Warren, has specifically defined what are needs, wants and savings, thus allocating your funds in the most optimum fashion. Needs are nothing but stuff without which it will be impossible to live, example: rent, house loan EMI, grocery bills, electricity, water, etc. Whereas wants are not necessary to survive, but are required to enhance your lifestyle, which may include dining out, travelling for leisure, exploring hobbies, and more. Lastly, savings for needs, should not be ignored as it will design your future after retirement or in case of a mishap, example, savings for house, retirement fund, child education, etc."
Prepare a dos and don’ts list: Make a list of what you intend to do and another of what you do not intend to do. This can include activities that you have wanted to try for a long time and wish to invest your time and money in, such as journaling, reading books, etc, and also things you’d like to take a break from such as partying, drinking, and so on. Making a list of dos and don’ts will not only free you from unhealthy and wasteful spending, but it will also reform your habits while keeping a close eye on them.
Use financial planners and apps: There are numerous apps available to help you manage your finances and keep track of your money. Some also allow you to set up auto-payments for less stressful bill and payment settlement. Some of the apps that can help track and plan are Up, Earnin, Dave, and Brigit.
This payday, be watchful and persevere as Dave Ramsey, a personal finance guru, businessman and author puts it: “I believe that through knowledge and discipline, financial peace is possible for all of us.”
With inputs from Sulekha Nair