From "Who Me?" to Money Master: Level Up Your Payday Plan

Hi Reader

Welcome to The Money Series and if you are new here, thank you for signing up. Personal Finance can feel ambiguous and overwhelming, but I am here to help simplify the journey.

Picture this: Payday hits and you let out a sigh of relief

You go about your month as usual due to the ‘Ostrich effect’ and suddenly, you can’t explain where all your money went. Is this you?

Here’s a 6-step waterfall approach to structuring your payday routine:

1. Know your anchor/baseline number

Track all your living expenses on a sheet, starting with your big-ticket items such as housing (rent/mortgage), groceries and food, transportation/gas, utilities (internet payment, electricity, etc,.), and every other monthly expense.

This is your financial baseline – the minimum amount needed to stay afloat each month. It’s important because it determines your emergency savings.

Ideally, it should be about 60% of your income (or less) and you should consider having a separate bank account for these expenses.

2. Move money into your Emergency Fund

Set aside funds for the ‘rainy‘ days. Some unplanned situations and expenses could easily derail your financial plans but an emergency fund can help prevent that.

Next week, we will explore emergency funds and the mechanics of setting them up.

3. Pay off debt

This step may not apply to everyone but if you have an outstanding debt, it is prudent to service them before deducting your savings or even your emergency fund contributions in some cases.

Debts usually carry higher interest rates than typical savings accounts hence you should prioritize debt repayment over savings.

If you have multiple debts, start by paying off the one with the highest interest rate and continue in that order each month.

4. Now you can pay yourself

This bucket includes savings, investment, and retirement planning.

Set aside a proportion of your income to your savings account which will then be channelled into investments. Last week, I wrote about automating your savings.

If your pension contributions have not been deducted from your income at source, this is where you set up your pension account. Most countries have tax-free accounts that you can maximize for your retirement planning, accumulating funds and interest that are not taxed.

5. Then you can invest in yourself.

This could be educational like signing up for a course or buying a book. It can also be for wellness – gym, therapy, and swimming classes.

Any activity that increases the quality of your human capital – earning power and overall well-being - fits here. You want to prioritize this especially early in your career.

6. Finally, you can now flex. Here’s the fun part -  your guilt-free spending fund. Enjoy!

That was a long list! I knowwwwww.

Note that all the steps may not be relevant to you. For instance, if you don’t have debt or if your retirement savings are deducted at source. Even though it may feel overwhelming, you probably only have to do this a few times, and with account automation, you will do the steps without trying.

YOLO (You only live once) and should not allow money to control what you can or cannot do. Take control of your finances and be the first to notice when things start to shift.

Questions or comments? Just reply to this email!

Act Now:

Calculate the total cost of your living expenses and discover what percentage of your income they consume.

Reflect on This:

What is your anchor number?

Disclaimer: This does not constitute financial advice. Please conduct your research or consult your financial advisor for important financial advice.

Till next week, I am rooting for you, money-ly!

Dee

P.S: if this email was shared with you, please subscribe here

P.P.S: I know it’s probably not payday yet for you but the best time to prepare for payday is BEFORE payday.