Do This Every Time You Get Paid (millionaire payday routine)
In this article, I will show you the six essential steps you need to take with your paycheck to get out of debt, become financially free, and stay wealthy.
So grab a notebook, and let’s get started on your journey to financial success.
To make the most of my content, take notes on the topic if you feel ready.
Table of Contents
- Find Your Financial Baseline
- Build an Emergency Fund
- Pay Off High-Interest Debt
- Invest for the Long-Term
- Automate Your Finances
- Keep Learning
- Conclusion: Avoid the Financial Mistakes
Step 1: Find Your Financial Baseline
First, it’s crucial to establish your financial baseline, which sets the foundation for effective budgeting and planning.
Many people shy away from this first, yet very crucial step.
You have to know where you stand with your money before you can get started.
People often perform something called mental accounting, a common pitfall where money is categorized mentally, leading to overspending and instability.
Instead, create an expense spreadsheet detailing all your monthly expenditures, including essentials like rent, utilities, and groceries.
Doing this provides clarity on your essential obligations.
Analyze your expenses to identify core essentials vital for your well-being each month, such as housing, groceries, and utilities.
Aim to keep your financial baseline under fifty percent of your total income.
If it exceeds this threshold, look for opportunities to reduce expenses without compromising your basic needs.
By establishing a clear financial baseline, you gain valuable insights into your needed expenses, setting the stage for effective financial management.
This foundational step is crucial for managing your paycheck and achieving long-term financial stability.
Step 2: Build an Emergency Fund
Next, build an emergency fund.
Imagine the peace of mind you’d have knowing you have saved up to six months’ worth of expenses in your bank account.
This fund acts as a safety net, protecting you from unexpected events like job loss, illness, or injury.
It provides financial security and ensures you can maintain your lifestyle without falling into debt during tough times.
To get started, calculate your essential monthly expenses and multiply by six to determine your target emergency fund amount.
Begin by setting aside a small portion of each paycheck until you reach this goal.
Remember, having an emergency fund is not a luxury; it’s a necessity for financial security.
Beyond the element of safety, an emergency fund empowers you to make better decisions without the pressure of immediate financial strain.
It allows you to take calculated risks, such as pursuing new job opportunities or investing in personal development, knowing you have a cushion to fall back on.
Additionally, it helps maintain your mental well-being by reducing stress and anxiety associated with financial uncertainties.
Start by automating your savings process, directing a specific percentage of your income directly into your emergency fund.
This consistency will help you build the fund steadily.
In essence, an emergency fund is a cornerstone of a robust financial strategy, providing resilience and freedom to navigate life’s unpredictable moments with confidence.
Be aware that this may take you several months to build up.
If you feel lost on the journey, remember that financial success is a marathon and not a sprint.
You got this!
Step 3: Pay Off High-Interest Debt
After setting up the emergency fund, paying off high-interest debt should be the next priority.
Establishing an emergency fund first is crucial because, without it, unexpected expenses like a broken washer can force you into additional debt.
With an emergency fund in place, you can handle such surprises without derailing your financial progress.
Next, focus on paying off high-interest debt, which can strangle your monthly income.
For instance, a $6,500 credit card balance at 19.5% interest can take eight years to pay off with minimum payments, costing an extra $6,000 in interest.
Use the avalanche method by targeting the highest interest rate loans first while paying the minimum on others.
To get started, list all your debts with their interest rates and minimum payments, then make extra payments on the highest interest debt while maintaining minimum outflows on others.
This strategy helps reduce the total interest paid and accelerates debt payoff, freeing up more of your income for saving and investing.
Step 4: Invest for the Long-Term
After setting up the emergency fund and paying off all debt, it’s time to start investing.
A general rule of thumb is, that the earlier you start investing, the more time your money has to grow or compound on its own.
The concept of compound interest, where you earn interest on both the initial principal and the accumulated interest from previous periods, allows your investments to grow exponentially over time.
Even small, regular contributions to your investment accounts can result in substantial wealth accumulation over the long term.
The best way to invest for the long term is through index funds.
Index funds are designed to replicate the performance of a specific market index, such as the S&P 500.
This means that your investment will mirror the overall performance of the market, providing broad diversification and reducing the risk associated with investing in individual stocks.
By investing in index funds, you benefit from the overall growth of the market without having to pick individual winners and losers.
Index funds also offer low fees compared to actively managed funds.
Since index funds are passively managed, there are lower management fees and operational costs.
These savings can significantly boost your overall returns over time, as high fees can erode a substantial portion of your investment gains.
Additionally, index funds are tax-efficient, as they typically have lower turnover rates compared to actively managed funds, resulting in fewer taxable events.
Another key advantage of index funds is their simplicity and ease of use.
They require less research and management than individual stock picking or actively managed funds.
This makes index funds an ideal choice for novice investors and those who prefer a hands-off approach.
Let’s face it, nobody wants to work on the weekend to figure out which stocks to buy on Monday for 35 Years until you retire.
It’s boring and, as studies have shown, impossible to beat the market anyhow in the long run.
By consistently investing in index funds, you can build a robust and diversified portfolio that capitalizes on the growth of the entire market.
To illustrate, imagine you start investing $200 a month at the age of 25 in a diversified portfolio with an average annual return of 7%.
By the time you reach 65, your investment would grow to over $500,000, despite you only invested about $96,000 in total, thanks to the power of compound interest.
This demonstrates how starting early and consistently contributing to your investment accounts can lead to significant wealth accumulation over time.
However, as it requires no action from the investor, once everything is set up for automated investment, it can feel too good to be true given that it requires nearly no effort along the road.
While index investing offers numerous advantages, real estate investing still is the most popular way to prepare for retirement.
Although the performance of the real estate market has been good, there are some significant downsides to consider.
One major drawback is that only the principal part of your mortgage payments builds up wealth, not the interest part.
Over the life of a mortgage, the interest payments can amount to a substantial sum, which does not contribute to your net worth.
Furthermore, buying a house for personal use often means that the property does not perfectly suit your needs for most of the time you live in it.
For instance, a house purchased with the intent to accommodate a growing family may become too large once the children move out, leading to inefficiencies and additional maintenance costs.
This mismatch can detract from the overall value you get from the investment.
Additionally, owning a home can be impractical if you plan to move to another country for retirement.
Selling property can be time-consuming and costly, and the real estate market can be unpredictable.
In contrast, index funds offer greater liquidity and flexibility.
You can easily sell your investments in seconds and access your funds without the hassle and expenses associated with selling your property.
This makes index funds a more versatile option for those who anticipate significant lifestyle changes in the future.
Investing in index funds provides a straightforward, cost-effective, and flexible approach to building wealth over the long term.
While real estate can be a valuable part of a diversified investment strategy, it’s crucial to be aware of its limitations and the potential challenges it poses, especially when compared to the benefits of index investing.
By carefully considering these factors, you can make informed decisions that align with your financial goals and personal circumstances.
Step 5: Automate Your Finances
Automating your finances is a game-changer.
Setting up automatic transfers and payments ensures that your money is consistently allocated toward your financial goals without the need for constant manual intervention.
Automate savings transfers by allocating a portion of your paycheck to be transferred into your savings account.
This prevents the temptation to spend the money elsewhere.
Set up automatic payments for recurring bills such as rent, utilities, and insurance premiums to save time and avoid late fees.
Utilize automatic investment contributions to retirement accounts or taxable brokerage accounts, ensuring consistent wealth-building over time.
Step 6: Keep Learning
In the course of your journey, educating yourself on personal finance is crucial for making informed decisions.
Start by exploring YouTube, where channels like Graham Stephan and The Financial Diet offer free, easy-to-understand videos on various financial topics.
Reading books such as “Rich Dad Poor Dad” by Robert Kiyosaki and “The Total Money Makeover” by Dave Ramsey can provide deeper insights and strategies.
Additionally, online courses on platforms like Udemy and Coursera offer structured learning experiences, covering everything from basic money management to advanced investing techniques.
Utilizing these resources will significantly enhance your financial literacy and confidence.
Conclusion: Avoid the Financial Mistakes
Avoiding financial mistakes is key to your long-term wealth and security.
High-interest debt can take up a lot of your income, making it hard to save and invest.
Paying off these debts first will reduce interest costs and free up money for other goals.
Building an emergency fund ensures you can handle unexpected expenses without going into more debt.
Learning about personal finance helps you make better decisions.
Use resources like books, online courses, and financial advisors to improve your understanding and avoid common financial pitfalls.
Imagine paying off your high-interest debt, building an emergency fund, and then investing consistently.
Over time, you’ll see your financial situation improve.
You won’t be burdened by debt payments, your emergency fund will provide security, and your investments will grow your wealth.
The key is to stay disciplined, keep learning, and adjust your strategy as needed to meet your goals.
You got this!
Yours, Stephan
Book recommendation
“The Total Money Makeover” by Dave Ramsey:
