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Today we want to break down one of the most common things we hear from clients when reflecting back on how they handled their paycheck during their working years. In addition we will speak about a 4 step process that may be helpful when it comes to allocating the hard earned cash that’s made during that time.
Here's the brutal truth: We see all too often folks treat their income like a checking account, paying bills and hoping there's something left over afterwards.
But what if your paycheck could work like a systematic machine in helping you to work towards your goals?
The breakthrough thought process can be made when you stop thinking about your paycheck as money to spend and start seeing it as the engine for your future.
And this shift can go beyond budgeting. It’s about understanding that every dollar has a job, and some jobs pay better than others over time.
When this mental switch is made, patterns may become more visible and allow an understanding of how changes in one area can impact everything else.
To help better understand this, let’s introduce our 4-step process to allocating a paycheck. Before we do so, of course everyone’s situation is different and this may not be the best plan for you. Speaking with your accountant and trusted financial advisor can help determine how best to go about your individual situation.
Step 1:Allocate enough to maximize your employer 401k match (if applicable).
A shocking statistic is that nearly 25% of employees don't contribute enough to get their full employer match.
Prioritizing the 401k match first helps to get the full benefit from your employer. And the psychological win that can be kept in mind is that many times, when contributing to a 401k, the money goes directly into the retirement account before it even hits your bank. Even though you don’t see the larger sum in your account, you can be confident the allocation is going to a place which should help you save towards your retirement goals.
Step 2 is toautomatically transfer a set amount to a non-retirement investment account which we call a "flexible wealth bucket."
And while we have complete empathy to the fact that it might not be easy to save above and beyond one’s employer retirement plan, this strategy can help build wealth that can be used for more short term goals.
It has the potential to grow outside of retirement accounts, which means you can access it anytime without penalties.
Here’s another kicker- the potential tax advantage of utilizing the account.
When you invest in taxable accounts and hold your positions for over a year, you pay capital gains tax on any realized gains from the sale of the investment, as opposed to ordinary income tax.
For some people, that's a rate of 15% or 20%, instead of their regular tax rate which could be 22%, 24%, or higher.
Step 3 is topay off non-discretionary expenses and any outstanding credit card balances in full, each pay period.
For many people, this might be step 1 instead of step 3 but this is where a mindset shift overtime can be helpful.
The money for non-discretionary and credit card payments is what's left after you’ve already checked your savings boxes and can help keep constraints on lifestyle inflation.
This may be the most difficult step to get through but overtime if you can get to this point, it can potentially help you build wealth while hopefully keeping your expenses down.
AndStep 4:Everything left over becomes discretionary spending
By the time you reach Step 4, you’ve already, maximized your employer match, built a flexible wealth bucket for opportunities, and eliminated your debt.
Now, whatever's left is truly yours to spend.
Although some might consider this the least important step, psychologically, it's huge.
In fact, what can happen is that when you get to this step and know exactly how much you have for discretionary spending, you can become more intentional about how to use it.
Instead of mindless spending throughout the month, you can focus on making conscious choices about what truly adds value to your life.
The Final Word:
As mentioned previously, this should not be considered advice for any individual as everyone’s situation is different. If the four step process isn’t attainable due to your current situation, focusing on steps 1-3, even with tiny shifts can be a great starting point.
Thanks for reading!
Disclaimer:
Rockline Wealth Management (RWM) is a registered investment adviser located in Islip Terrace, NY. RWM is registered with the U.S. Securities and Exchange Commission. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission.
Rockline Wealth Management does not offer tax or legal services. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
All information presented is believed to be factual at the date of publication.
All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's investment portfolio.
Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. The opinions expressed and material provided are for general information and should not be considered a solicitation of financial advice or for the purchase or sale of any security.
Real-life and fictional examples given in this blog should not be viewed as guaranteed outcomes when investing. Past performance is not indicative of future results and every individual’s investment circumstances are different. Individuals should consult their financial professional before implementing their investment plan.
Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future.