What do you do when a paycheck arrives in your bank account? Not having a plan for the money can result in impulsive purchases or unproductive assets that don’t do much for your wealth. However, you can build wealth faster if you use each paycheck correctly, and financial guru Vincent Chan recently shared some strategies to maximize your cash.
“It all starts with creating your money map,” Chan explained in a recent TikTok.
Chan proceeded to describe the key components of a money map and how you can create one.
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The Four C’s Of Every Money Map
A money map lays out how you will spend your money, and Chan breaks it into four components. The first number is your capital. This number reflects your take-home pay after your job and side hustles.
After identifying your take-home pay, the next step is to identify your core expenses. These necessities include housing, groceries, utilities, healthcare, transportation, and other essentials. Chan believes you should set aside up to 60% of your income for this expense category.
Then, you put money into your choice buckets, otherwise known as discretionary spending. Chan suggests up to 20% of your take-home pay for this category. The compound bucket, the final component of the money map, should get at least 20% of your take-home pay.
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You Don’t Have To Follow The Exact Percentages
Chan’s percentages only serve as a guide. Not everyone has to allocate 60% of their take-home pay toward living expenses and other essentials. If you can, it’s optimal to invest well more than 20% of each paycheck and trim down on discretionary expenses.
However, other people may have tighter finances and only have the means to invest 10% of their paycheck each month. You can always adjust the percentages as your financial situation changes. The main benefit of this exercise is knowing where each dollar will go instead of winging your finances.
Itemizing your expenses can also help you decide on the right percentages. You may review your discretionary spending and realize that you can remove some expenses. This step will allow you to invest more money. You don’t even have to do this forever. If you can temporarily boost the amount of each paycheck that you invest, the compounding returns will put you in a better position when you approach retirement.
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Focus On Growing Your Income
A money map allows you to account for every dollar, but you can only cut costs for so long before it becomes unfeasible. If you want more money to invest and spend, you have to prioritize income growth.
A higher income gives you a higher ceiling. While you shouldn’t spend every dollar you make, raising your income to $100,000 will give you more options than earning $50,000 per year. Working extra hours, asking for a raise, job hopping, and picking up a side hustle are some of the ways you can boost income. The latter two are more effective than the first two in the long run.
However, if you grow your income without addressing your personal finances, you risk falling behind on long-term goals. Making more money doesn’t make you a better person or more capable of managing your finances. A higher salary simply makes you more of what you already are. Mastering the basics of personal finance will help you capitalize on higher paychecks when they arrive.
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This article Vincent Chan Explains What You Should Do With Every Paycheck: ‘It All Starts With Creating Your Money Map’ originally appeared on Benzinga.com
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