Ranking the Worst Things You Can Do With Your Paycheck
Written by
Angela Mae
Edited by
Amber Barkley
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Whether you get paid once a month, biweekly or otherwise, there’s nothing quite like the feeling of holding your paycheck in your hand — or seeing the funds deposited into your account. And even if much of your money goes toward monthly bills, it can still be a relief having it on hand.
But no matter how frequently you get paid, or how much you earn, there are certain things you shouldn’t do with your hard-earned money. This includes neglecting your retirement accounts and living beyond your means.
With that in mind, here are the worst things you can do with your paycheck and what you can do instead.
10. Not Automating Your Finances
Many processes, such as online bill pay and savings contributions, can be automated. If you’re not automating at least some of your paycheck, you could be setting yourself back financially.
“The biggest hindrance towards building wealth is actually human behavior,” said Kendall Meade, CFP at SoFi. “One way to overcome the challenges of human behavior is to automate your finances as much as possible so that you aren’t relying on willpower alone. Automation allows you to make a tough decision once and reap the rewards on an ongoing basis. Whether your focus is saving, investing or paying down debt, you can automate your next best action to put your financial future on autopilot.”
9. Not Saving Any Money
Like an emergency fund, having a savings account can be hugely beneficial, especially if you’re trying to save up for some long-term goals. And although you will ideally have a separate emergency fund, a savings account can still help in the case of unplanned expenses.
“It’s always important to put away some money in savings each month,” said Evan Tunis, president of Florida Healthcare Insurance. “Savings can be used in the event of an emergency, or just for future financial goals like purchasing a home. Not saving money is one of the worst things you can do with your paycheck, as it will leave you vulnerable to unexpected costs and unprepared for the future.”
8. Not Using a High-Yield Savings Account
High-yield savings accounts (HYSAs) are similar to traditional savings accounts, but they have higher yields. If you’re not using one for your emergency fund or savings, you’re likely missing out.
“Don’t leave your dollars waiting to be spent, or [sitting] in a low-yield account,” said Maya Sudhakaran, the head of growth and acquisition at Plynk. Instead, transfer them to a HYSA. You can also set up automatic contributions to your HYSA to further increase your savings.
7. Neglecting Your Emergency Fund
After paying their bills, many people spend their extra money on leisurely activities or other nonessentials. And while an occasional splurge isn’t likely to cause financial problems, failing to set aside some cash for emergencies can.
“Not setting aside a portion of your paycheck for an emergency fund leaves you vulnerable to unexpected expenses, which could force you to rely on high-interest debt to cover them,” said Anthony De Filippis, the director at Amplify 11, a Penrith Chartered Tax Accountant firm.
It’s generally recommended to save between 3 and 6 months’ worth of your typical monthly expenses in the form of an accessible emergency fund in case something happens. But even if you start with a few hundred or $1,000, that amount can still help with small emergencies.
6. Falling Into Lifestyle Creep
Lifestyle creep, or lifestyle inflation, is another major mistake people make with their earnings. It’s especially common with people who are earning more than they used to and so increase their spending.
“It can be easy to get caught up in what I like to call lifestyle inflation,” Meade said. “This is when your expenses increase as your income grows — a bigger house, nicer cars, etc. This is a double whammy, because not only are you not saving, but your expenses are growing, so the lifestyle [you] are accustomed to will cost more in retirement. The best way to combat this is by saving the majority of any raises and/or bonuses you receive.”
5. Living Beyond Your Means
Overspending is another major mistake people make with their paycheck. Not only can overspending lead to debt, but it can also prevent you from achieving important financial goals.
“Overspending and failing to live within your means can lead to accumulating debt and financial stress, said Justin Albertynas, CEO of Ratepunk. “It is extremely essential to budget responsibly and avoid excessive credit card usage that might result in high-interest debt. This often catches people completely off guard as they suddenly get hit by the huge credit card payments and sometimes even have to downscale their life quality just to stay afloat.”
“Well, the worst is to spend all the money, at once, immediately, for the things you do not actually need,” added Sigita Kotlere, CEO at Nectaro. “Overspending or living beyond your means can lead to financial instability, debt and stress. Failing to prioritize saving or investing can impede your ability to achieve long-term financial objectives and undermine your future financial stability.”
4. Ignoring High-Interest Debt
Failing to pay off high-interest debt, or making only the minimum payment when they can afford more, is another critical mistake people make with their paycheck.
“Failing to prioritize paying off high-interest debt, such as credit card balances, can lead to a snowball effect where the debt grows exponentially over time,” said De Filippis.
“This approach is a damaging strategy that prolongs the repayment period significantly and results in much higher total payments over time due to accruing interest,” added Eliza Arnold, founder at Arnie. “It’s like taking one step forward and two steps back; individuals are constantly paying, but the debt barely decreases.”
Even if you can’t always afford the minimums, you should strive to make on-time payments.
“Neglecting loan or credit card payments will lead to mounting interest charges, penalties and damage to your credit score,” said Albertynas. “It will definitely hurt more than paying when you’re supposed to in the long run.”
3. Not Having a Plan or a Budget
Having a plan is crucial to achieving your short-term and long-term financial goals, as well as to building financial stability. Without a plan and a realistic budget, you could end up spending more than you should, taking on debt or falling behind on retirement and other goals.
“Simply said, the lack of [adequate] budgeting skills and a lack of planning may lead to suboptimal financial management and challenges in meeting crucial expenses. This way, you will always be in debt, and will simply not find your way out,” said Kotlere.
“Once you get your paycheck, I would strongly advise you to consider [a] 4-step action plan: planning, saving/investing, paying off debt and planning for the future,” added Kotlere. “Keep in mind that the most detrimental actions with your paycheck include impulsive spending, neglecting debt and failing to save or invest.”
Sudhakaran added, “Don’t go in blindly. Instead, set clear financial goals: Start by outlining your short, medium and long-term financial goals. While these do include long-term items like planning for retirement, there will likely also be goals across your financial journey like building an emergency fund, saving for a down payment on a house, funding higher education or paying off debt.”
2. Not Investing Your Earnings
While investing might not always be at the top of your priority list, a lot of people neglect it altogether. But when you don’t invest a portion of your earnings, you can end up falling short on other things, like retirement planning.
“One of the most significant missteps people can make with their paycheck is neglecting to contribute to a retirement savings account, such as a 401(k) or an IRA,” said Arnold. “This is especially detrimental when an employer offers matching contributions. In these cases, not participating is essentially equivalent to turning down free money. By failing to contribute, you’re missing out on the compounding growth that these tax-advantaged accounts can offer, which is crucial for ensuring financial security in retirement.”
“Roughly a quarter of employees leave money on the table by not taking advantage of their employer match,” added Meade. “However, if you have no employer match, you should start contributing to a 401(k) as soon as you have taken care of foundational items, such as paying off high-interest rate debt and building an emergency fund.”
1. Investing Too Aggressively
On the other hand, there’s such a thing as investing too much of your paycheck, especially if you need more of that money in liquid form or if the market suddenly crashes.
“While investing can certainly pay off in the long run, investing too aggressively with your paycheck can be a risky move and have dire consequences if the market crashes,” said Tunis. “Before investing, it is best to talk to an experienced financial advisor who can help you make smart investments that align with your risk tolerance.”
A financial advisor, Tunis added, “can help you review your income and expenses, create budgeting plans that make sense for you and discuss different investment strategies that best fit your goals.”
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