Do This Every Time You Get Paid. Accountant Payday Routine

Summary

In this video, Nischa, a qualified accountant, outlines eight crucial steps to manage your finances effectively after getting paid. She advises starting with understanding your essential living expenses, creating a quick solution fund for emergencies, paying off high-interest debt, maximizing employer match retirement contributions, and building an emergency fund. Nischa also emphasizes the importance of investing in yourself for potential income growth and the opportunity cost of investing additional income, encouraging viewers to consider their financial goals and risk appetite.

Takeaways

• 📊 The first step to financial management is to establish a reference point by calculating your essential living expenses and comparing them to your net income.
• 🦩 Avoiding the 'ostrich effect' means confronting your financial situation rather than ignoring it, which is a common reason people live paycheck to paycheck.
• 💡 Keep your essential living expenses below 60% of your net income to ensure financial stability.
• 💰 Create a 'quick solution fund' by saving one month's living expenses to cover unexpected emergencies without incurring debt.
• 🚫 Pay off high-interest debt as soon as possible to avoid overpaying and to free up funds for other financial goals.
• 📈 Prioritize paying off debt over building a savings fund if the interest on the debt is higher than what you could earn on savings.
• 💼 Maximize employer matching contributions to retirement plans for free money and tax benefits.
• 🏦 Build a 3 to 6-month emergency fund for a financial safety net, which is crucial for unexpected life events.
• 💼 Invest in yourself by seeking a pay raise or starting a side hustle to increase your income and fund further financial goals.
• 🌐 Utilize tax-free accounts like Roth IRAs or ISAs to start investing and take advantage of compounding for long-term growth.
• 💭 Consider the opportunity cost when deciding how to allocate additional income, whether it's paying down debt, investing, or other life goals.

Q & A

What is the first step Nischa suggests to manage your finances after getting paid?

The first step is to know your reference point by calculating your essential living expenses such as housing, groceries, transportation, insurance, and other costs for the next month.

What is the 'ostrich effect' mentioned in the script, and how does it relate to personal finance?

The 'ostrich effect' is a cognitive bias where people avoid information that causes discomfort, like checking bank accounts after spending excessively. This avoidance behavior can lead to poor financial management, as it prevents individuals from facing their financial reality.

Why is it important to calculate your total essential living expenses?

Calculating total essential living expenses is important to establish a reference point for your financial planning. It helps you understand how much of your net income should be allocated to cover these costs, ideally keeping it below 60% of your net income.

What is the purpose of a 'quick solution fund' as described in the script?

A 'quick solution fund' is meant to provide psychological comfort and peace of mind by ensuring that you have savings to cover unexpected emergencies like car breakdowns or health issues, without having to go into debt.

How does Nischa suggest handling high-interest debt, and why?

Nischa suggests using your savings to pay off high-interest debt as soon as possible because debt usually costs more than savings earn. This approach is more financially sensible than keeping the debt and separately building a savings fund.

What are the two methods mentioned for paying off debt, and what do they involve?

The two methods for paying off debt are the 'snowball' method, which involves paying off the smallest debts first for psychological motivation, and the 'Avalanche' method, which focuses on paying off debts with the highest interest rates first.

Why does Nischa recommend focusing on employer match retirement contributions after managing essential expenses?

Focusing on employer match retirement contributions is recommended because it's essentially free money from your employer, and it also reduces your taxable income for the year.

What is the significance of building an emergency fund, and how much should it cover?

Building an emergency fund is significant as it provides a safety net for unexpected life shocks. It should ideally cover 3 to 6 months' worth of essential living costs, or 6 to 9 months if you're in a higher-risk industry or self-employed.

How does Nischa view the allocation of money between investing in one's skills (step six) and traditional investing (step seven)?

Nischa views investing in one's skills as a way to potentially increase income through a pay rise or side hustle, which can then be invested. She suggests doing both if possible, but prioritizes skill investment as it can have a more immediate impact on income.

What is the opportunity cost mentioned in the script, and how does it relate to investing additional income?

The opportunity cost refers to the potential benefits an investor misses out on when choosing one investment over another. In the context of investing additional income, it's about deciding whether to pay down debt, invest in assets, or allocate funds differently based on personal priorities and financial goals.