If you want to get better with your money and stop struggling financially, then you need to do these nine steps as soon as you get paid. These were the exact steps I took as soon as I started working and a big reason why I became the first multi-millionaire in my family.
For those new to the site, hi, I’m John, a personal finance geek that’s been obsessed with all things related to money since I was a kid. And in this post, I’ll share my paycheck routine so you can apply them too and hopefully achieve even better results.
This post may contain affiliate links, meaning I get a commission at no cost to you if you decide to make a purchase through my links. Visit this page for more information. The content on this page is accurate as of the posting date; however, some of the offers mentioned may have expired.
Step-by-Step Paycheck Routine
Step 1
The first step is to find your financial baseline by separating your wants and needs. You might be surprised by this, but this is actually the hardest step for most people because our brains are hardwired to avoid things that make us uncomfortable.
That’s why we avoid checking how much money we have left in the bank after a big shopping spree. But putting our heads in the sand is just going to make things worse long-term. It’s one reason why, according to a NerdWallet survey, that more than 50% of Americans are living paycheck-to-paycheck.
The good news is that it’s super easy to find your financial baseline. Just grab a pen and a piece of paper and split it into two columns, one for wants, and one for needs. Now, get your recent bank and credit card statements and place each expense item under one of those two categories.
Wants should include stuff like your Netflix subscription, Starbucks lattes, and movie tickets. The rule is if you can survive without them, then it’s a want, not a need, so yes, that avocado toast and spa treatment, while nice, are not needs.
Needs should be things like your mortgage or rent, car payment, cell phone service, insurance, utility bills, and food from the supermarket.
Total up the amount in your “needs” column. This amount is your financial floor – the bare minimum you need to get by each month. Ideally, aim to keep it under 50% of your total income. Now, don’t treat this amount as something you can’t change as there are things you can do to lower the costs.
For example, houses and apartments can be super expensive, especially in major cities. Would it be cheaper to live outside of the city and commute to work? If so, it’s worth considering.
If you’re fortunate enough to own a home, you can even do what I did and rent out the spare bedrooms for extra cash. I did this throughout my 20s and early 30s before getting married and made close to $100,000 for doing so.
If you don’t have spare bedrooms to rent, consider renting out empty areas in your home. There are many people who live near you who will pay to rent out storage places like your garage, closet, attic, and basement through platforms like Neighbor.
And look, maybe you don’t want to cut back any more or rent things out, and that’s completely fine, but it’s worth seeing if there are some areas you can save money without impacting the quality of your life too much.
If you can’t reduce your expenses, you’re gonna have to increase your income, which can come from getting a promotion or starting a side hustle. Your earning potential is always higher than your saving potential.
I know making your needs cost less than 50% of your paycheck might sound a little impossible right now and how it may come across from an older millennial, but I really do understand what it’s like to earn very little.
I didn’t grow up wealthy. My first job was bagging groceries at a local supermarket for minimum wage. It took a significant amount of time to level up my income to hit a financial baseline of 50% of my salary. But trust me, if I can do it, so can you, especially with all the side hustle opportunities that’s available today.
Step 2
Step two is to build your emergency fund. An emergency fund is money you shouldn’t touch unless something unexpected happens, like a major car repair, an oven replacement, or a sudden medical procedure.
According to 2024 Bankrate study, 59% of Americans don’t have enough savings to cover an unexpected $1,000 emergency expense.
Life isn’t smooth sailing and at some point, an emergency will come your way, like when my wife cut her finger down to almost the bone while pruning a tomato plant. It was a nasty cut late at night, right before our flight to Bahamas.
The 24/7 clinic we went to ended up charging us a total of $1,200 to disinfect and seal up her finger. That took a chunk out of our emergency fund, but it was that emergency fund that protected us when we needed it most and prevented us from taking a loan with crazy interest rates.
I recommend having an emergency fund that will cover at least 6 months’ worth of your financial floor. So, if your financial floor is $3,000 per month, you need to save $18,000 in your emergency fund.
The best place to put your emergency fund is in a separate bank account so you’re not tempted to spend it. But don’t put it in a typical savings account. Instead, open a high-yield savings account.
My HYSA is at UFB Direct Savings, which is paying me a 4.01% interest rate. Compare that to the national average rate of 0.41% – my UFB account is giving me 9 times more.
I know some of you are already thinking, “I know a CD that pays 5%.” Don’t get me wrong, that’s a great rate, but a CD requires you to lock up your rate for period of time and the whole purpose of an emergency fund is to act as a safety net that you can withdraw from in an emergency. It’s not there to make you money so having it locked away for some time totally defeats the purpose of having one.
If you need to draw from your emergency fund at any time, your first priority as soon as you get back on your feet should be to replenish it. Treat your emergency fund right and it will return the favor.
Step 3
Once your emergency fund is set, the next step is contributing enough to your employer-sponsored retirement plan to get any matching funds that your employer offers.
The reason you should do this before paying off high interest debt is that employer matching funds are risk-free, guaranteed returns on your investments, usually at a higher rate than your debts. This is the closest thing to free money as you can get.
According to Vanguard, almost half of employees with a 401(k) plan don’t contribute enough to get their full employers match, which is basically like your boss offering your raise and you saying, “Nah, I’m good.”
For example, if your employer offers 50% matching on the first 6% of your contributions to a 401(k) plan, you want to make sure you contribute 6% of your salary to take full advantage of the match.
So, let’s say you’re making $60k a year. If you contribute 6% of your salary, which is $3,600, then your employer is going to throw in another $1,800. That’s an instant 50% return on your investment!
And thanks to the power of compounding, if you use the $1,800 each year to invest in a total U.S. stock market fund like VTI, assuming an average annual return rate of 10%, that will grow to $325,000. And that’s just the free money your company is giving you.
If your employer doesn’t match or if you don’t have an employer-sponsored plan, then skip to the next step, which is step four.
Step 4
Step four in your paycheck routine is to pay down your high interest debt, like credit cards. Credit cards generally have very high interest rates, so you should always prioritize paying them off before you even think about investing your money.
The stock market returns about 10% on average, but what good is that if your credit card is charging you a 20% interest rate? Paying down that debt is a 20% return on your money. That’s much better than you’d get investing in the market, and it’s a guaranteed return – something that the market can’t offer.
In fact, if you have any debt that’s charging you above a 10% interest rate, I think having a smaller emergency fund of one month’s worth of expense is temporarily acceptable so that you can take care of the debt as soon as possible.
For instance, if you have credit card debt across multiple cards, the most logical strategy to tackle this is the avalanche method, where debts are paid down in order of interest rate, starting with the card that carries the highest rate. This is the optimal way of paying down debt because you will pay less money overall compared to the snowball method.
The snowball method, popularized by Dave Ramsey, is where debts are paid down in order of balance size, starting with the smallest amount. Paying off smaller balances first gives some people a psychological boost because it feels like you’re making faster progress. The downside is that your larger loans may be at higher interest rates, costing more in the long run because they’re left untouched for longer.
You should also consider consolidating your debt into a single loan with a lower interest rate. SoFi offers personal loans that will do just this and you’ll also earn a $300 bonus if you get a loan through them.
The exact rate offered to you depends on multiple factors, but you can check for free without having any impact to your credit score.
Step 5
The next step is to contribute to an HSA, which is the acronym for Health Savings Account. Now, you’ll only have access to one if you have a high-deductible health plan, but if you do, it’s the ultimate retirement account, even though it isn’t technically a retirement account.
It’s an account that was created as a way for people to set aside pre-tax income to cover health care costs, but with its triple-tax advantage, an HSA ranks as the best option for your retirement savings.
First, your contributions are TAX DEDUCTIBLE, so you immediately save money by avoiding federal income taxes and Social Security taxes.
Second, your earnings grow TAX-FREE. Your HSA is like a savings account that grows with interest, but after you put $1,000 or so, depending on your plan, you can invest the rest in stocks to supercharge your growth.
Everything you make in your account is not subject to taxes until you take money out.
Third, similar to retirement accounts like a 401k or IRA, once you retire and decide to withdraw funds, you’ll have to pay taxes on the withdrawn amount.
However, unlike other retirement accounts, an HSA can be used for healthcare expenses during retirement too and money used for that is NEVER taxed at all.
Think of the HSA as a super-charged retirement account. Not only does it have the benefits of both a traditional IRA and Roth IRA, but it comes with a benefit that neither IRA offers, using it during retirement for medical purposes tax-free.
Step 6
The next step is to contribute to an IRA. After contributing enough to your 401(k) plan to get the full match, it’s generally better to add money to your IRA versus a 401(k) plan.
IRAs generally have better investment options because you can open one with a brokerage of your choice. Low-cost providers like Fidelity and Vanguard offer low expense ratio index funds.
Currently, the annual contribution limit is $7,000 for those under 50 and $8,000 for those 50 and older.
Step 7
The next step is to invest in yourself, because the easiest way to increase your income is to learn and attain more skills and knowledge.
Like if you invest in your education to learn new skills to offer to your employer, that may get you a raise or that coveted promotion.
One of the things I did some years ago was to learn how to create and grow a personal finance website. It was my little side hustle project at the time that made a couple hundred dollars, but I knew I wanted to invest back into my website design and development and it’s honestly been one of the best investments in my life.
I was able to leave my corporate career and run my own digital media business – all thanks to the accumulation of my education, experience, and skills I learned along the way. Put your money into the right resources and it will pay back in dividends.
Step 8
The next step is to start investing with a regular brokerage account.
But I would take advice from friends and family on which companies to invest in with a grain of salt, because no one can actually predict what an individual stock in a company is going to do and if you pick the wrong one, you could lose all your money. Hello Enron.
For 99% of people, it’s much better to just keep it simple and invest in a low-cost index fund and hold it long-term. A solid option is Vanguard’s index fund, VTI. This fund essentially covers the entire U.S. stock market. With this single fund, you’re investing in 3,615 companies; large ones, medium ones, small ones, it’s got you covered.
It also only charges an expense ratio of 0.03%. That means for every $1,000 you invest; it’s only charging you $3 dollars a year. That is crazy low.
The U.S. stock market returns about 10% a year, meaning your money will basically double every 10 years without you needed to do anything else. So, if you invest $6,000 a year from age 26 to 66 with an average annual return rate of 10%, you’d end up with over $2.7 million.
Do nothing with the $6,000 a year and you’d end up with just $240,000. That’s a big difference that will really impact your life.
Now, this doesn’t mean you can’t invest in individual stocks or riskier assets like crypto. I don’t have anything against that, but you should only dedicate a very tiny portion of your portfolio to them, like 5% to 10%.
A lot of people ask me what brokerage I like. I started with Fidelity as my main brokerage and love their platform, but for someone young starting out, I really like Moomoo. They have a great app and offer commission-free trading in U.S. stocks, ETFs, and options for U.S. residents.
So, if you’re interested in Moomoo, sign-up with my link and once you make a qualified deposit, you can get up to 15 free stocks and a limited-time 8.10% APY on your uninvested cash for the first 3 months.
Step 9
After you accomplish all of that, the final step in your paycheck routine is to save for other goals. Common examples include saving for a down payment for a home or a car, your kid’s college fund if you have one or plan to have one in the future, and putting money aside for a vacation.
The thing is, by the time you get to this point, you’re already ahead of 95% of people and have a lot of flexibility in what you want to prioritize next.
The Bottom Line
I achieved financial independence in my 30s by doing these nine steps. What step are you at and what’s been challenging to reach the next one?
I use my HSA strictly for investing as I can afford to pay my health related expenses without dipping into the HSA funds. However, I often wonder if the 22% tax savings now would be better used and treated as a “discount” on my health related bills. My question is this, can I save all my receipts from my health related expenses that I pay for NOW and reimburse myself from my HSA in 15 or so years when I hit age 59.5?
Excellent question, Jessica. I actually do the same and use my HSA for investing purposes with its triple tax advantage. The answer to your question is yes, you can save your receipts for health expenses and use them in future years. I scan my receipts digitally for this very purpose as you may need to provide copies of the receipts to prove that you spent HSA funds on qualified medical expenses if the IRS audits you.