Expert Advice: 7 Essential Paycheck Rules to Live By


Many Americans are barely making ends meet. They live paycheck to paycheck with no end in sight. In fact, 69 percent of our citizens have less than $1,000 in savings, according to a recent GOBankingRates survey.
Breaking the paycheck-to-paycheck cycle doesn’t always involve major life changes, like getting a huge raise, changing jobs or moving. Here are some simple steps you can take to maximize earnings, lower taxes and boost your bottom line.

1. Open a Pair of Checking Accounts
If you are a savvy saver, you can use two checking accounts to budget your paycheck:
- One account is earmarked for paying fixed expenses, such as rent, loan payments and other bills.
- The other account can be tapped for flexible expenses, such as gifts, entertainment and eating out.
Joe Mecca, a spokesperson at Raleigh, N.C.-based Coastal Federal Credit Union, uses this system to manage his paycheck. “I like to keep my money separated,” he said. “This makes it easier to track, ensures my savings and bills are taken care of, and helps prevent overspending.”
The easiest way to implement this system is to automate it, Mecca said. He has set things up so that on payday, some of his paycheck automatically transfers to a separate checking account he uses to pay bills.
Other money from his paycheck automatically goes into a money market account for his emergency fund and longer-term savings. "What’s left stays in my regular checking account as my discretionary spending," he said.
When you first start out with this method, it’s wise to overestimate discretionary spending until you get a handle on how much you actually spend on things such as eating out and entertainment. “Make sure you leave some extra for discretionary spending — as long as the total isn’t more than you make that month,” Mecca said.
Related: How to Open a Checking Account

2. Save First, Spend Later
Saving money should always remain a top priority. “On payday, set aside some savings before spending a dime on the rest," Mecca said. Using this method means that even if you eventually spend all of your paycheck, you’ve already fed your savings, he said. “One of the biggest hurdles many people face is getting to the end of their budget period and not having anything left for savings," Mecca said. "If you make a habit of saving before you spend, you’ll thank yourself later.”
Again, automating your savings is the easiest way to save first and spend later. “Your credit union — or bank, if that’s your thing — should have tools to let you schedule bill payments and transfers to savings,” Mecca said. Start small and increase the savings amounts over time to make this transition easier. For example, try something like saving 5 percent from each paycheck, and increase that amount a little each month until you hit your goal.

3. Follow the 50/20/30 Rule
Are you unsure about how to budget your paycheck? Natasha-Rachel Smith, consumer affairs editor at cashback shopping site TopCashback, recommended following Sen. Elizabeth Warren’s 50/30/20 rule. “You should spend only 50 percent of your after-tax income on essentials, such as housing and food; 30 percent on lifestyle choices, such as vacations; and 20 percent on financial priorities, such as debt repayments and savings,” Smith said.
Smith said this rule is a key to saving for big purchases, such as a down payment on a house or graduate-school tuition. It also helps you stop living the paycheck-to-paycheck cycle.
To make this paycheck rule work, consider your after-tax income — that’s the amount you get paid after taxes and other costs are taken out. It can be shocking how much smaller your paycheck is after everything is said and done, so make sure you’re working off take-home-pay numbers.

4. Find Coupons for Your Expenses
Paying the full cost of some expenses in your budget is unavoidable. But you can get a discount price on others. Before that paycheck hits your account, make a list of your expenses. Then, it’s time to hunt for bargains. “Whether it’s booking a routine oil change or grabbing a bite to eat, search for deals locally to see where you can cut costs and get the most bang for your buck,” Smith said. “It’s amazing how the same product can be a couple of dollars more at one store compared to another.”
If you aren’t sure where to start looking for deals, Smith has a few tips:
- Try a Google search.
- Download apps such as GasBuddy to identify the cheapest gas stations near you.
- Take advantage of loyalty and cashback programs. Smith is a fan of the 5 percent cash-back Target REDcard program.
“By not overspending, your paycheck will go a longer way,” she said. One word of caution for new bargain hunters, though: Don’t buy something just because it’s a good deal. Stick to a list of items you really need to make this paycheck rule work.

5. Keep the Change
Have you heard of the old-school savings method of never spending your spare change? With this approach, you always use paper bills to pay for things and then put any leftover change in a rainy-day jar.
However, this system requires you to keep cash on hand at all times. In addition, keeping your savings in a jar at home isn’t the most secure way to safeguard your nest egg.
Luckily, there are other options. Chime is a bank account with a "Save When You Spend" program that uses a Chime card to help you save spare change. “When you enroll, we round up each transaction to the nearest dollar and transfer the round-up to savings," said Shane Steele, Chime vice president of marketing.
You can also use Chime to automate your savings. "Our “Save When You Get Paid” program lets members automatically transfer 10 percent of every paycheck to savings," Steele said. "It’s a great way to pay yourself first without thinking about it.”
Acorns is a similar service, but the spare change goes into an investment account instead of a bank account. Digit is another service that automatically saves extra money for you, but it uses an algorithm to determine when you have a little padding in your bank account, rather than rounding up or saving a set amount.
If you are considering using a “save the change” service, make sure you educate yourself on any fees before enrolling.

6. Lower Your Taxable Income
Taxable income is the money you make before taxes are taken out. Lowering your taxable income can help you keep more cash in your pocket. Two options for lowering your taxable income include:
- Making contributions to a 401k or IRA. Each of these retirement accounts has big tax benefits. Contributions you make to a traditional 401k or IRA will lower your tax bill for the year. However, if you invest in a Roth 401k or Roth IRA, you will not see an upfront tax break. Instead, your break will come later in retirement.
- Contribute to a flexible spending account or health savings account. Many employers offer these accounts, which allow you to save money pretax for future health expenses. These programs can lower your taxes, but there are strict rules about how the money can be used. Make sure they are right for you before diving in.
Those are just two of the ways you can legally cheat your tax bracket.

7. Get Your Withholding Right
If you got a big tax refund last year, it means your paychecks were a lot smaller than they needed to be. It's likely you had too much taken out in taxes during the year. On the other hand, if you owed a lot at tax time, you probably weren’t having enough withheld from your paychecks.
You can fix this issue by making adjustments to your W-4, the form you fill out that lets your payroll provider know how much tax to take from your paychecks. The IRS has a withholding calculator at its website that can help you determine how much you should have withheld in taxes from each paycheck.
Taking out too much or too little tax from your paychecks can both cost you, so it’s important to get this number right. “If you didn’t have enough money taken out, you may incur additional penalties for not paying in enough taxes," said Lisa Lewis, a certified public accountant and blog editor at TurboTax. "Alternately, if you’re having too much taken out of your paychecks to get a bigger refund, you will be short cash every month.” If you like getting a refund, play with the numbers on the W-4 calculator until you strike the right balance.
Keep Reading: 50 Ways to Live the Big Life on a Small Budget