If you’re like most people, you don’t make nearly as much money as you could spend each month. Of course that doesn’t stop many people from spending more than they make! A retirement rocket scientist knows better though. So what’s the best way to spend your paycheck each month? I’m not a fan of strict budgets or putting money into buckets, though both can be helpful tools when starting off on the path of financial independence.
So how should you spend your money? To start, I recommend sending $100 to me each month. Wait, that’s not the best use of your money! In reality, it helps to take a step back and note what’s important to you in the big picture. Why do you feel you’re on this big blue planet, and what would you like to accomplish while you’re here? Everyone doesn’t have the same answers to those questions, which means all of us may have different goals with our money. That doesn’t mean it’s impossible to come up with a strategy for spending. It all comes down to our goals.
A lot of people share similar goals, lead a good life, share experiences with friends, become financially independent, help others, and send me $100 a month. Those aren’t the only goals that people have though. Someone might want to create a new business, others may want to leave a legacy to their children, while others may want to become famous.
Once you know your goals, it’s time to spend your money to achieve them. This is where the topic of personal finance comes in, and where we can start to answer the question of how to spend each paycheck. Maslow’s hierarchy of needs is a theory on what we need to survive, starting with food, water, and air, moving on to clothing and shelter. Since these are the base needs, it’s a pretty good place to start determining where to spend your money.
Only you can determine what the right amount to spend is, but it doesn’t take a rocket scientist to know you’ll have more money to meet your goals if you spend money to make meals at home instead of going out for every meal.
- A place to live
- Things to eat
- Ways to travel around
- Helping others
- Becoming financially independent
- Creating experiences
There’s your list on how to spend your paycheck. From here it’s up to you to decide how each dollar can provide the most bang for the buck. A place to live can be a tent in the woods or a penthouse apartment. Ways to travel around can be a pair of shoes or a new Tesla. Helping others can be donating your time mentoring kids or giving 10% to charity. Creating experiences can be anything from brewing beer and riding a motorcycle cross country to taking a cruise and traveling the world.
Now it comes to actually spending your hard-earned money. What would I recommend?
- First off is to pay your monthly obligations. This can include your mortgage, car insurance, electric bill, and any debt with an interest rate higher than what you can earn in the next category.
- Second is to put money towards your goals. This can be in the form of 401(k) contributions, real estate investments, stocks, bonds, mutual funds, and ETFs, or paying down debt.
- Third is what you can spend on variable household expenses like food and gas. This is also what you can use to pay the luxuries you choose not to live without, such as a cell phone and Internet access. Yes, people do live without these things, and if you don’t have money to meet your goals, you need to cut back somewhere.
This all sounds simple enough, but each category could have a handful of giant asterisks. The goal of this site is to help address some of those asterisks. Ultimately it all comes down to incentives.
If you’ve ever read Freakonomics you have a good idea on how incentives work (or don’t work). The book is a fascinating read on why we don’t pay people to give blood and why houses often don’t sell for as much as they could. So what do incentives have to do with how you spend your paycheck? You should invest in the things that allow you to obtain your goals, and the incentive to do so is the satisfaction of reaching your goals.
What is important is that you realize each dollar you waste is a dollar you can’t spend to meet your goals. What are you goals? How can you reallocate what you spend to meet not only your basic needs, but your long-term goals?