The First Thing You Should Do With Every Paycheck

Most of us know the thrill of payday, when the money lands in your account, or the check in your hands, and your bank account temporarily feels flush.

Having a pile of money in hand, even a small one, is tempting to spend, but financially responsible adults know that you have to prioritize your savings, so you don’t find yourself in the financial lurch.

GOBankingRates spoke with financial experts on the first thing you should do with every paycheck, and here’s what they said.

It’s tempting when that paycheck arrives to go splurge on leisure or material items you’ve been coveting in between paychecks. However, if you pay for the fun stuff before the necessities, you’ll find yourself in trouble.

Carter Seuthe, CEO of Credit Summit, said, “Once you receive a paycheck, the first thing I recommend doing is paying any bills according to your budget and bill paying schedule. Then, pay whatever amount you have budgeted to go toward a credit card, loan or any other outstanding debt payments.

“After you’ve taken care of all of this, you can focus on paying yourself — this is when money goes toward savings or discretionary spending.”

The first thing people should do with every paycheck is pay down debt, according to Andrew A. Lokenauth, a financial and wealth advisor and author of The Fluent in Finance Newsletter. “This is because debt is a liability, which means it costs you money in the form of interest payments. The sooner you pay off your debt, the more money you will save in the long run.”

Debt means paying interest, so “every dollar you pay towards your debt is a dollar you don’t have to pay in interest,” Lokenauth said.

It also improves your credit score, which helps you get approved for loans at lower interest rates, which can save you even more money in the long run.

Better yet, Lokenauth said, it gives you peace of mind and financial freedom, and then you can start putting your money into savings and investments.

Automating your savings is a powerful technique to ensure consistency and discipline in your financial habits, according to Sandi Huynen, a financial consultant at Winnipeg Mortgage Broker.

“Designate a portion of your paycheck to be automatically transferred to a separate savings account,” she said. “This could be for short-term goals like a vacation or a down payment on a house, as well as long-term goals like a child’s education or a dream purchase.”

Though financial advice varies from person to person, the one piece of advice that Greg Vojtanek, financial planner and owner of Fade In Financial, gives nearly everyone is to start an emergency fund.

He said, “If you don’t have one established, then getting that off the ground should be your main priority.”

Once that’s funded appropriately, then you can start putting your paycheck to work, he said, whether that’s saving for retirement, paying down debt, investing for college or any other important goal.

Thomas Codevilla, a CFA, business attorney and co-founder of SK&S Law Group, has a unique approach to what you should do with your paycheck.

Instead of immediately allocating funds to debt repayment or investments, he leans into a concept he calls “cash flow velocity.”

He said, “With each paycheck, I prioritize channeling money into a high-yield savings account. From there, I dynamically distribute funds to various financial instruments, like paying off high-interest debts or exploring short-term ventures that promise extra income.”

He finds this approach works better, because the high-interest savings yields extra money he can then use to do whatever makes the most sense, whether that’s paying off debt or jumping on an investment opportunity.

Mark Zinder, a financial coach with Mark Zinder & Associates, recommends paying yourself first. But this doesn’t mean go out and blow a lot of money.

“People tend to save after they have spent,” he noted. “Save first.”

By saving, he actually means looking into investment. Zinder said there are five things that will determine the outcome of your portfolio over the years:

1. How much you invest
2. How often you invest it
3. How long you invest it for
4. The tax consequences
5. The rate of return

He’s found that people spend too much time focused on the rate of return, the one thing you have no control over. Instead, Zinder recommends the “rule of 72” approach when it comes to investing.

“Take 72 and divide it into the rate of return,” he explained. “For this example, I will use the long-term historical average of the stock market, which is a tad bit over 10%. Take 72 and divide by 10 and you get 7.2. So, $1 grows to $2 in 7.2 years. The point of my story? It’s the last double you can’t afford to miss out on! The sooner you start and the longer you have, the more money you have before that all important double on the back side.”

All of these financial tips are practical and useful, so you can’t go wrong with any one of them.

Barri Segal contributed to the reporting for this article.