When your paycheck arrives, you might just focus on paying the bills and having a little left to buy what you want. But if you want to grow your wealth, you’ll need to strategize how you use the money.
In a recent YouTube video, Jaspreet Singh — a financial guru, attorney and entrepreneur — suggested three smart things to do with your next paycheck. These include considering tax strategies, properly allocating your cash and investing to grow wealth.
Find Ways to Save on Taxes
Singh emphasized the importance of understanding the tax code so you can reduce how much of your income goes to federal, state and local taxes. Since this can get complex, it’s best done with an accountant’s help to avoid tax penalties and legal issues.
One option is to contribute to a traditional or Roth 401(k) or IRA. With traditional accounts, you avoid taxes now on contributions and pay them when you withdraw the money. Roth accounts don’t offer this immediate perk, but you can withdraw the contributions and earnings tax-free later if you follow the rules. Singh recommended a Roth account if you want to avoid the uncertainty of future tax rates or plan to earn a lot during retirement.
In addition to seeking various other tax deductions and credits for individuals, you can consider starting a side business. This lets you both generate income and become eligible for new tax perks. Singh suggested options such as making a blog or YouTube channel and writing off “ordinary and necessary expenses” under an accountant’s guidance.
Give Each Dollar One of 3 Jobs
Rather than spending your whole paycheck, you need a system where you also save and invest. Your savings will likely only earn a low return, but that cash will be there for emergencies. And while investments come with risk, the higher potential return can help you grow your wealth.
Singh advised the following for allocating your paycheck: “One of the things that I like to say is something like a 75/15/10 plan to start, which says for every dollar that you earn from here on out, 75 cents is the maximum that you can spend, 15 cents is the minimum that you should be investing and 10 cents is the minimum that you’re saving.” Having three separate bank accounts is ideal for this strategy.
He also suggested reallocating your savings money to investments once you reach a certain goal. Depending on your situation and risk tolerance, you might first save between three to 12 months of your expenses and then put 25% of your paycheck toward investments.
Use Your Cash to Grow Wealth
Singh said that investing your money in options such as real estate and stocks can help you earn income even when you’re not working. This is why it’s such an effective strategy to grow wealth.
However, he cautioned against aiming for unrealistic and unsustainable returns when you choose investments. Instead, expect the 7% to 10% average annual return that’s been typical with the stock and real estate markets over the last several decades. He also suggested that you consider any high-interest debts you have since it may make more sense to pay those off before you invest money.
It’s easy to feel overwhelmed with options when you’re new to investing. Singh recommended just starting out investing a small amount in something that interests you. That way, you can learn along the way while you reduce your risk of losing a lot of money. Eventually, you’ll find an investment strategy that works for you.
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