Financial Management: Eight Steps to Take as Soon as You Get Paid

Introduction

• Speaker: Nisha, a qualified accountant with 9 years of experience in banking.
• Focus: What to do with your money when you get paid.

Step 1: Know Your Reference Point

• Ostrich Effect: Avoiding discomforting financial information.
• Budget Calculation:
  • List expenses: housing, groceries, transportation, insurance.
  • Compare with net income to determine the reference point.
  • Aim to keep essential expenses below 60% of net income.
  • Adjust by reducing costs, e.g., renting out space, changing phone plans.

Step 2: Quick Solution Fund

• Importance: Psychological comfort knowing you’re covered for emergencies.
• Goal: Save one month of living expenses in a high-interest, accessible account.
• Not necessary to build a full emergency fund yet.

Step 3: High Interest Debt

• Debt Cost: Paying more over time due to interest, e.g., credit cards.
• Strategy:
  • List all debt with interest rates above 7-8%.
  • Choose a repayment method:
    • Snowball Method: Pay smallest debts first for psychological motivation.
    • Avalanche Method: Pay highest interest debts first for economic efficiency.
  • Use savings to pay off high interest debt.

Step 4: Employer Match Retirement Contributions

• Timing: Focus only after stabilizing current finances.
• Benefits:
  • Free money from employer matching contributions.
  • Reduces taxable income.
  • Build up a larger emergency fund (3-6 months of living costs).

Step 5: Emergency Fund

• Build on the initial solution fund to cover 3-9 months of costs.
• Essential for job loss or unstable income situations.

Step 6: Invest in Your ROI

• Personal Investment: Increase skills and knowledge for higher income.
• Starting Early: Compounding benefits of early investment.
• Tax-Free Accounts:
  • Roth IRA (US) or stocks and shares ISA (UK).
  • Use platforms like Trading 212 for investing.

Step 7: Opportunity Cost

• Decision Making:
  • Prioritize based on risk appetite and personal goals.
  • Options: Pay off mortgage, start a business, or invest in private equity.

Conclusion

• Apply eight steps to manage payday effectively.
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