According to the Federal Reserve’s latest Economic Well-Being of U.S. Households report, 49% of Americans said their monthly spending was equal to or more than their monthly earnings. This trend was common even at higher income levels.
Read More: I Paid Off $40,000 in 7 Months Doing These 5 Things
Trending Now: 25 Places To Buy a Home If You Want It To Gain Value
In a YouTube video, personal finance expert Jaspreet Singh explained, “It’s not your income that will determine if you become wealthy or not — it’s what you do with your income.” Here are five things he suggested doing with each paycheck so you have money left to build your wealth.
Rather than using their paychecks strategically, many people get into the routine of spending whatever they earn. That’s why Singh recommended a three-bucket setup that ensures you allocate a portion of your income to different purposes.
His system involves having three separate bank accounts for spending, investing and saving, and using automatic transfers between them. Singh said you should use no more than 75% of your pay to cover your spending, and invest at least 15% while saving at least 10%.
He added that savings should include three months to one year of expenses. While the target amount will depend on your life situation and responsibilities, having even three months of emergency savings would put you ahead of 54% of Americans, according to a recent FINRA Foundation report.
Find Out: Dave Ramsey Says This Is the Best Way To Pay Off Debt
Singh said, “The mistake that so many people make is they assume that if I make more money, all my financial problems will be solved.” When your paycheck goes up, you might find yourself paying for more things, like a new car or a fancy vacation, even if you originally intended to invest or save some money. As a result, you could end up living paycheck to paycheck even on a higher income.
Following Singh’s three-bucket system helps you avoid that problem, and you may find that you use less than 75% of your higher paycheck for expenses. You could then redirect more money to investments that accelerate building wealth.
As for getting a raise, Singh recommended providing specific examples of your value as an employee, such as extra duties you’ve taken on that help the company’s bottom line. He also discussed side gigs as another way to make extra money.
While some financial experts recommend prioritizing debt repayment over investing, Singh takes a more situational approach that considers your financial position and debt type.