TikTok’s Humphrey Yang: 7 Steps To Take With Every Paycheck
Written by
Nicole Symon
Edited by
Rebekah Evans
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When you receive your paycheck, it’s tempting to rush out and treat yourself. But if you want to improve your finances, that’s not the way to go.
Humphrey Yang, a personal finance creator and former financial advisor, recently released a YouTube video discussing the seven steps you should take each time you receive a paycheck. Below is his advice.
Also, here are ways to save more of your paycheck.
1. Budget 50% of Your Paycheck for Necessities
The first thing Yang recommends is to immediately set aside half your paycheck for necessities. Necessities include your mortgage or rent payment, food, transportation, utilities and healthcare. Anything you require to live belongs in this category of your budget.
It’s important to specify that 50% is just a guideline. People living in lower-cost areas may only need to spend around 40% of their income on necessities. If you live in a higher-cost-of-living area, that percentage could increase to around 60%.
Calculate your current spending in this category and compare it to your income. According to Yang, your spending on necessities shouldn’t exceed 70% of your income. You should examine your spending and find areas to cut costs if it does.
He encouraged viewers to “figure out your numbers intimately so you know how much money you have left over for Steps 2, 3, 4, 5, 6, 7, etc.”
2. Make Minimum Payments on Your Debt
According to Yang, your next step should be to make minimum payments on all of your debt obligations. Your debt may include a mortgage, car loan, credit card debt, student loans or personal loans.
Yang highlights the importance of making on-time regular debt payments: “It’s a lot easier to maintain a good credit score as long as you’re making the minimum payments on all of your debt obligations.”
After all, even a single late payment on your debt can tank your credit score. If your percentage of on-time payments falls below 97%, it puts you in the “very poor” category for payment history on your credit score.
Late payments stay on your credit report for six years. It can take your credit score a long time to bounce back from just one missed payment, but regularly making on-time payments will help.
3. Establish (or Add To) an Emergency Fund
After making minimum debt payments, you should establish an emergency fund. If you already have one, add to it in this step.
Yang recommends saving at least three to six months of living expenses in your emergency fund. That way, you’ll have a nice buffer if you lose your job or face other unexpected financial difficulties.
For example, if your total monthly living expenses are $3,000, your emergency fund should have between $9,000 and $18,000 in it at any given time.
Save this money in a high-yield savings account to earn interest while keeping it liquid. “[The] important thing with your emergency fund is that it should be liquid, which means that you can access it at any time,” Yang said. If an emergency strikes, you need to be able to access these funds immediately.
4. Invest in Your Retirement Account
Yang recommends setting aside at least 10% of your paycheck for retirement. At a minimum, if your employer offers a 401(k) match, try to use it to your advantage.
Say you earn $100,000 annually and your employer offers a 5% 401(k) match — if you contribute $5,000 yearly to your 401(k), your employer will match that for a total of $10,000. That’s $5,000 in free money from your employer toward your retirement. You can also invest more than the amount your employer matches.
401(k) accounts are specifically for retirement, so don’t use them for general investing. “If you actually do withdraw before retirement age, you pay a penalty. When you put your money into a 401(k), you’re essentially locking it up until you retire,” Yang said.
The best way to accomplish step four is to set up your retirement contribution as an automatic withdrawal from every paycheck. That way, you don’t have to remember to save for retirement.
5. Pay Off Your High-Interest Debts
Your next step is to put money toward any outstanding debts other than a mortgage. Yang mentioned two popular methods for tackling debt:
- The Avalanche Method: Prioritize paying off your debt with the highest interest rates.
- The Snowball Method: Focus on paying off the smallest debt balance first.
Yang said he prefers the snowball method “because it gives you a lot of psychological momentum.” Whichever method you choose, put a portion of your paycheck toward eliminating your debt in this step.
6. Invest Further
In step four, Yang recommended investing in your 401(k) for retirement. In this step, he focuses on investing in other accounts.
You should invest any remaining funds in other investment accounts, such as a personal brokerage account.
7. Automate Your Finances
Finally, step seven is to set up automatic transfers from your paycheck. Instead of manually moving money to different accounts, you can set up automatic transfers to move your funds when you get paid.
For example, you can automatically send a portion of your paycheck to your emergency fund savings account. If you’re on step six, you can set up a transfer so a percentage of your pay goes to your investment accounts.
With automatic transfers, you set everything up once. After that, each new paycheck will be appropriately divided up between your accounts.
Final Take
Making the right moves when you receive your paycheck will help you stay on budget and in control of your finances. Start by budgeting 50% of your paycheck for necessities. Then, move on to making debt payments, building an emergency fund and saving for retirement.
Yang’s approach allows you to be more responsible and deliberate with your paycheck. Try these seven steps to see if they help you financially.
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