3 Things To Do With Every Paycheck, According to Ramit Sethi

©Ramit Sethi

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At the end of a pay cycle, many feel broke and confused about where their money went. They might create a detailed budget to track their spending and improve their finances. They may spend hours reviewing financial statements and credit card bills to determine where their money went and how to allocate it more effectively next month. If this describes how you handle your monthly paychecks, personal finance expert Ramit Sethi has some advice.

Sethi, author of the New York Times bestselling book “I Will Teach You to Be Rich,” has a blueprint for everything you need to do to pay your bills and fund your savings and retirement accounts each month — without lifting a finger. Sethi shared three critical steps to creating an automated paycheck routine to put you on your way to financial flexibility and stress-free spending each month.

Link Your Accounts

Setting yourself up to automatically save begins with correctly linking your accounts. Your setup will vary depending on the accounts that you use, but Sethi provided a blueprint involving a checking and savings account, 401(k), Roth IRA and credit card.

For this hands-free approach to work, it’s essential that your employer directly deposits your paychecks into your checking account. If you don’t have direct deposit set up, speak with an HR representative to do so.

To link your accounts, you can speak with a banking representative, but the easiest path is through online platforms. Gather your accounts, URLs and passwords first, and get ready to link everything. In most cases, you’ll find options like “Transfer,” “Link Accounts” or “Set Up Payments” that you can use to connect your accounts.

Sethi provided three steps on how to properly link your accounts.

1. Connect your paycheck to your 401(k). Some employers automatically deduct 401(k) contributions from a paycheck. In this case, you’ll be able to skip this step.
2. Link your checking account to your Roth IRA, savings account and credit card. You should also set up payments for specific monthly expenses, like rent payments, if you cannot put them on your credit card.
3. Connect your credit card to your fixed monthly payments and bills. Be sure to use your credit card for payments and bills whenever possible, as this can lead to points, rewards and a better credit score. However, don’t put more on your card than you can pay off in full each month.

With your accounts linked, you can move on to the next phase of simplifying your monthly savings process.

Set Up Your Automatic Money Flow

According to Sethi, the key to effectively setting up your payments is making sure that everything follows a logical timeline. Optimizing your payment schedule ensures a straightforward, predictable money flow each month.

A disorganized schedule can lead to unneeded confusion. If you get paid on the 15th of each month, but your credit card payment is due on the 10th and you must pay rent on the 28th, keeping track of your finances will be difficult. By coordinating your transactions over the same string of days each month, you’ll spend less time reviewing bank statements and credit card bills to determine how much cash you have available.

Sethi noted that your payment schedule may take a few months to fall into place. He advised keeping a couple hundred dollars in your checking account to act as a buffer in the beginning. Once your monthly financial calendar works smoothly, you can remove the buffer without worry.

To get your schedule on track, you’ll need to contact the companies and financial institutions directly or log onto their websites to switch your billing dates. Setting up your bills to take place over a week will simplify your finances the most. Sethi provided a basic example, assuming you receive your paycheck on the first of every month.

• April 1: Your employer transfers your paycheck to your checking account via direct deposit.
• April 2: A portion of your paycheck transfers to your 401(k), unless it was already taken out of your paycheck by your employer.
• April 5: Your checking account automatically transfers predetermined amounts to your Roth IRA and savings account. This extra time accounts for any problems or late payments that may occur with your paycheck.
• April 7: Your credit card or checking account automatically pays off your monthly payments and bills.

With your savings and payments now accounted for, you’ll know exactly how much you can spend over the next three weeks.

Tweak the System To Work for You

This system is basic and caters to those who have a consistent salary. However, there are ways to tweak Sethi’s system to make it work for your particular financial situation. Sethi explained two alternate approaches that you can use if you don’t fit into the traditional mold outlined above.

You Get Paid Twice a Month

The first option works for anyone who gets paid twice monthly. If you get paid on the first and the 15th, setting up your payments over a week may be challenging and provide you with less flexibility for one half of the month.

To optimize the process to suit your schedule, Sethi suggested splitting the system in two, using half the money each time. For example, use your paycheck on the first to cover your monthly bills and payments. Then, use your paycheck on the 15th to fund your Roth IRA and savings goals.

Your Payment Schedule Is Irregular

Sethi advised accumulating a buffer for anyone who has irregular payments, such as freelancers or contractors. He specifically suggests saving a buffer amount that could fund you for three months if you lived on bare necessities, without any extra spending or saving. For example, if your bare-bones cost of living for one month was $3,500, you should plan to save $10,500 before you can optimize this system.

Once you’ve saved your buffer amount, you’ll have the flexibility not to worry about your automatic money flow month to month. In months when you don’t earn enough to properly fund the process, you’ll take money from your savings buffer. In good months, when you make more than usual, you take your extra money and pay it back into the buffer.

Put Your Money on Autopilot

Setting up an automatic money flow ensures that you’re paying yourself first. With your money on autopilot, you’ll fund your savings and retirement accounts and make all necessary monthly payments, allowing you to use your money guilt free for the rest of the month. Use Sethi’s tips to help improve your finances and reduce stress.

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