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.

Outlines

00:00

💼 Managing Payday Finances

The paragraph introduces Nischa, a qualified accountant, who outlines eight steps to manage finances effectively after receiving a paycheck. The first step is to acknowledge one's financial reality, overcoming the 'ostrich effect' by calculating essential living expenses such as housing, groceries, and insurance. A reference point is established by totaling these expenses and comparing them to net income, aiming to keep them below 60% of income. The importance of a quick solution fund for emergencies is emphasized, suggesting saving one month's living expenses in a high-interest, easily accessible account.

05:00

💳 Tackling High-Interest Debt

This section discusses the importance of addressing high-interest debt to avoid overpaying on purchases. Nischa explains that the average credit card debt in the UK and US is substantial, and using debt to buy items leads to increased costs due to interest rates. The solution is to use savings to pay off high-interest debt, as it typically costs more than savings earn. Two debt repayment strategies are presented: the snowball method, which focuses on paying off the smallest debts first for psychological motivation, and the avalanche method, which targets debts with the highest interest rates first. The paragraph also touches on the tax implications of interest earned from savings.

10:00

💰 Investing in Your Future

The final paragraph emphasizes the importance of investing in one's future through employer match retirement contributions and building an emergency fund. Nischa suggests focusing on employer matches first, as it's essentially free money and reduces taxable income. The paragraph also discusses the benefits of saving 3 to 6 months' worth of essential living costs for emergencies. The importance of investing in oneself through education and skills to increase earning potential is highlighted. Nischa also introduces Trading 212, a platform for investing in stocks and shares, and explains the advantages of using tax-free accounts like a Roth IRA or ISAs. The paragraph concludes with a call to subscribe to the channel for more financial advice.

Keywords

💡Payday

Payday refers to the day on which an employee receives their salary. In the context of the video, it's the starting point for managing personal finances effectively. The script emphasizes the importance of having a plan for what to do with the money as soon as it's received to avoid overspending and financial stress.

💡Ostrich effect

The ostrich effect is a cognitive bias where individuals avoid information that causes discomfort, often ignoring financial realities. The video uses this term to illustrate why some people might avoid checking their bank accounts or facing debt, which can lead to poor financial management.

💡Reference point

A reference point in the video is the calculated amount of essential living expenses one should cover with their net income. It serves as a benchmark to measure financial health and is used to guide spending and saving decisions. The video suggests keeping this number below 60% of net income.

💡Quick solution fund

The quick solution fund, as mentioned in the script, is an emergency fund that provides psychological comfort and peace of mind. It's meant to cover unexpected expenses like car repairs or medical bills without incurring debt. The video encourages saving at least one month's living expenses in this fund.

💡High-interest debt

High-interest debt refers to loans or credit card balances with high interest rates. The video advises paying off such debts using savings to avoid overpaying in the long run. It contrasts the cost of debt with the potential earnings from savings, highlighting the financial wisdom of debt reduction.

💡Snowball method

The snowball method is a debt repayment strategy where one pays off the smallest debts first to gain momentum and psychological satisfaction. The video presents this as a motivational approach to debt elimination, suggesting it as one way to tackle high-interest debts.

💡Avalanche method

The Avalanche method is another debt repayment strategy that focuses on paying off the debts with the highest interest rates first. The video explains this as a more mathematically sensible approach compared to the snowball method, aiming to save on interest payments.

💡Employer match

Employer match refers to the additional contributions an employer makes to an employee's retirement fund, typically up to a certain percentage of the employee's contributions. The video emphasizes the importance of maximizing this benefit as it represents 'free money' and reduces taxable income.

💡Return on Investment (ROI)

In the video, ROI is discussed in the context of investing in oneself, such as through education or skill development, to increase earning potential. The video suggests that the potential for increased income from a raise or side hustle can then be invested further, emphasizing the importance of personal growth for financial gain.

💡Opportunity cost

Opportunity cost in the video refers to the potential benefits an individual misses out on when choosing one alternative over another. It's used to discuss the trade-offs involved in financial decisions, such as paying down a mortgage versus continuing to invest in various financial instruments.

💡Tax-free accounts

Tax-free accounts, like the Roth IRA in the US or the Stocks and Shares ISA in the UK, are mentioned as vehicles for investment that allow earnings to grow without immediate tax implications. The video encourages using these accounts to maximize investment returns and take advantage of tax benefits.

Highlights

Understanding the 'ostrich effect' and its impact on financial avoidance behavior.

The importance of calculating essential living expenses to establish a financial reference point.

Keeping essential living expenses below 60% of net income as a financial guideline.

The psychological comfort of having a quick solution fund for emergencies.

The strategy of using savings to pay off high-interest debt to avoid overpaying.

Choosing between the snowball and Avalanche methods for debt repayment.

Maximizing employer matching contributions to reduce taxable income and build retirement funds.

The significance of building an emergency fund for financial security.

Investing in one's own skill set and knowledge for higher returns and potential pay raises.

Utilizing tax-free accounts like Roth IRA or stocks and shares ISA for investment.

The benefits of investing in stocks, index funds, ETFs, and user-made portfolios.

Earning interest on uninvested cash with platforms like Trading 212.

Considering the opportunity cost when allocating additional income for investments or debt repayment.

Prioritizing financial goals based on risk appetite, income category, and life vision.

The option to fully pay down a mortgage for debt-free living and increased freedom.

The potential to invest in private equity, peer-to-peer lending, and taxable investment accounts.

Transcripts

when it comes to Payday it's hard to know what  to do with your money you get paid and before  

you know it your bank account is at zero again  if you're new here I'm Nischa I'm a qualified  

accountant with 9 years of experience working in  banking and in this video I wanted to walk you  

through the eight things you need to do as soon as  you get paid the very first thing you want to do  

is know your reference point that is Step number  one there is something called the ostrich effect  

which is a cognitive bias that causes people to  avoid any information that can make them feel  

sort of discomfort they would rather act like  that information didn't exist this is maybe why  

you rather not check your bank account after a big  night out or you'd avoid looking and facing your  

debt but this idea of just bearing your head in  the sand when it comes to your finances is a big  

part of why a third of the UK and 64% of the  US population lives paycheck to paycheck the  

solution isn't as hard as what people make it  out to be calculate exactly what you spend on  

housing groceries Transportation Insurance over  over the next month as well as any other costs  

that make up your essential living expenses next  you want to figure out how much of that makes up  

your total net income you can do this using your  own method if you want to use a free template that  

I use there's one Linked In the description so  you list out all the costs in the First Column  

that says fundamentals and add your net income  at the top and then this cell to the right in  

this box here is a number you need to know that  number now becomes your reference point it's what  

you're going to come back to in the next step  and and in step five the guideline is to keep  

that number below 60% of your net income again  this sale will tell you where you're at if it's  

over go through each of the items and think about  whether you can reduce it maybe if you're living  

in a two-bedroom flat you can rent out your  spare room or whether you can swap it for a  

cheaper alternative maybe you don't actually need  50 GB of data on your phone contract knowing your  

reference point helps you immediately move on to  step two the quick solution fund being good with  

money involves two things first is understanding  the basics the basic math part second is often  

overlooked it's the psychological aspect sometimes  even if the numbers suggest one choice the best  

choice might actually be the one that makes you  feel more comfortable this idea is important both  

for this step and for step seven imagine the  psychological comfort of knowing that even if  

your car breaks down if your boiler fails or if  you need Urgent health Care it will all be taken  

care of you don't have to go into debt to pay for  these emergencies that is what the benefit of a  

solution fund is the psychological comfort  and the peace of mind just from having this  

fund tucked away somewhere and knowing you can get  access to it that's hard to quantify the aim is to  

take the total of your one month living expenses  that you calculated in step one and save them in  

a solution fund save it in a place where you can  get high interest and as easy to access when you  

get to one month of expenses you can pause there  it isn't necessary to build up a fully fledged  

3 to 6 month emergency fund at this point instead  we are now going to focus on the most mathematical  

sensible approach which leads US directly onto  step three what's better than buying something  

now and not having to pay for it months or years  down the line the answer is not overpaying for  

it let me explain in the UK the average credit  card debt per person is just over £1,200 and  

in the US it's just over $5,700 we use debt to  buy everything from clothes gifts Furniture if  

you're not paying it off you're overpaying if you  pay for an iPhone with your credit card which has  

a 22% interest rate then that £1,000 or $1,000  iPhone isn't costing you $1,000 anymore after  

a year it would have cost you $1,220 that is $220  more than what you should have paid so if you have  

high interest debt instead of keeping it taken by  and separately working on building a savings fund  

what you want to do instead is cancel them out  use your savings to pay off your debt you might  

be thinking how does that make sense everywhere  you hear it's about saving and I'm telling you  

to use your savings to pay off your debt well  debt usually costs more than savings earn if  

you have 1,000 sitting in your savings account  earning 5% a year after one year you would have  

made 1,050 essentially you're $170 worse off than  if you had used that money to pay off your high  

interest debt instead so what's the best way to  approach this step one list out all the debt that  

you have that has an interest rate of above 7  or 8% step two decide how you're going to pay  

off whether you're going to use a snowball or the  Avalanche method the snowball is the psychological  

optimal route simply put it means paying off the  smallest of your loans as quickly as possible and  

once that debt is paid you take the money that  was used for that payment onto the next smallest  

debt the idea of this is that once you see that  you're able to pay off a loan and you have that  

under your belt you have the motivation to keep  going but there are times where the additional  

time and the additional money investment of the  strategy doesn't make sense and that's when the  

Avalanche method comes in Instead This focuses  on paying off the loan with the highest interest  

rate First Once the highest interest debt is paid  you put that money towards the account with the  

next highest interest rate and then the next one  and so on until you're done step three use your  

savings to focus that debt in the order of which  you chose a little side note here depending on how  

much you're saving and where you're located the  interest through your savings can also be taxed  

that makes the benefit of using extra savings to  continue and stay at this step rather than saving  

it even more Justified now you have a little  more freedom to do what you want but first  

let's move on to step four this has come in lower  on my less than you would see on other personal  

finance channels and the reason for that is that  it essentially involves sacrificing your current  

disposable income for a future pay increase in  my opinion there's no point in planning for your  

financial future if your present finances aren't  even in order and so only once the last step is  

complete then you should focus on employer match  retirement contributions in most countries you  

have to opt into this plan and call your HR  department to get you enrolled in the UK by  

default you're automatically enrolled into your  workplace pension scheme 10% of people choose to  

opt out if you're in that 10% I'm hoping is to  do one of the steps above if it isn't then you  

can focus on this step until you've maximized  all the benefits it's worth making use of this  

for two reasons firstly it's free money from your  employer that typically matches your contributions  

up to a certain percentage of your net income  for example if you contribute 5% of your net  

income your employer will match that 5% you  can continue this until you've received the  

full match you don't need to go any further  at this point the second reason why this is  

a great option is that it reduces your taxable  income this year and this isn't something that  

you can back dat you can't use your last year's  allowance this year so if you don't use it up if  

you don't use that employer matching contribution  this year you've lost it whilst taking this step  

in you should also begin saving 3 to 6 months  worth of your essential living costs that same  

amount that you calculated in step one and you  do this to build out an emergency fund this fund  

it's a big bigger safety net for you to fall back  on those bigger unexpected but inevitable life  

shocks if you lose your job you don't want to be  worrying about how you're going to pay your bills  

or being forced to take on the first available  job that comes at you just so you can make ends  

meet in most cases you will be fine for 3 months  of your living cost purely your living cost but  

if you're in a higher risk industry with a lot  of layoffs or if you're self-employed with an  

unsteady income then 6 to 9 months is even better  step six your Roi people have different views on  

how they should allocate their money between step  six and step seven my view is that the easiest way  

to make more money is through getting a pay rise  or through starting a side hustle and to do this  

you need to invest in your own return in your  skill set in your knowledge in the extra value  

that you can bring the extra money that you can  bring on the side or through a pay rise can then  

be invested into the next steps in the order  that I discuss them the reason why I've done  

it in this order is because if you focus on step  seven or step eight first first that journey to  

wealth becomes more prolonged the best solution  if you can afford to do it is to choose to do them  

alongside each other if you have enough money to  do them both alongside each other then that's the  

option when you want to go because by starting  early with investing you're on the right side  

of the curve when it comes to compounding and the  exponential growth you can have when time is on  

your side is life-changing so the first thing  to do is make sure you're fully utilizing any  

tax-free accounts that are available to you so for  instance a Roth IRA if you're in the US or if in  

the UK there are different types of ISAs the one  I'm referring to more specifically is the stocks  

and shares Isa I've linked some of my favorite  in the description below including trading 212  

which lets you start investing for as little as  one pound trading 212 lets you invest in stocks  

index funds ETFs and user made portfolios and if  you're in the UK it lets you do it through an Isa  

so the money you make through capital gains and  dividends is taxfree what I like about trading 212  

is that it's one of the most innovative platforms  available they were one of the first to introduce  

fractional shares and now with their most recent  announcements you can also earn interest on your  

uninvested cash so that's currently 5% on your  GBP balance 5.1% on your US dollar balance and  

4.2% on your Euro balance and this is paid daily  and there's no limitations to the amount that  

you can hold uninvested so whether you're ready  to start investing at this step or you want to  

start maximizing your earnings on your uninvested  cash you can check out Trading 212 and two and  

get a free share worth up to 100 by verifying your  account and making a minimum deposit of1 and then  

using the promo code Nischa n through the menu bar  step eight the opportunity cost when it comes to  

investing additional income there is always an  opportunity cost in how you decide to allocate  

that money and what you could have done with that  money instead but really it comes down to what  

you want to prioritize and how you want to carve  out your life and at this point some people might  

think that the best option is to fully pay down  their mortgage and live in their house completely  

debt free without any stress this means they  have the freedom to go part-time and start a side  

hustle or a business that they've always wanted  to it can mean they could travel for an extended  

period of time without worrying about mortgage  payments or it might mean fully paying off your  

student loan so you can take some rests and choose  a different career path other people might find it  

a better option to continue investing in things  like private Equity peer-to-peer lending and  

also making use of taxable investment accounts  What do you do here there's no right or wrong  

when it comes to this step it's about using the  additional income you have in a way that fits  

your risk appetite your income category and the  vision that you have for your life that's how I  

allocate my money on payday if you want to get  started with step one then this video over here  

covers everything from how much you should  be spending on the different categories to  

the tools and techniques you can use when it comes  to managing your finances if you found this video  

useful I would love for you to subscribe over 70%  of people who watch my channel have not subscribed  

and it would mean the world to me thank you so  much for watching and see you in the next video