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7 ways to make the most of your paycheck

It’s impossible not to be excited once your payday arrives. You put in long hours — perhaps you even earned some overtime — and you can’t wait to reward yourself. However, before spending your paycheck on anything, always ask yourself: Am I budgeting my paychecks wisely?

As tempting as it might be to blow your next paycheck at the mall or on a flashy purchase — like a new car or the latest designer bag — resist the urge. Pretend that your next paycheck might be your last. In other words, make the most out of every paycheck. Here are seven tips that can help you do just that.

1. Create a Budget

If your paycheck is used to randomly pay for various expenses, bills and purchases — but you’re not keeping track of how much you’re spending on each expense — you definitely need to create a budget.

This first step can be as easy as writing down your monthly expenses in descending order of cost and determining how much of your net pay should go to each. You can use a flowchart, Excel, a budgeting calculator or one of several money budgeting sites, tools and apps — like Mint.com, which can break down what you’re spending your money on and help you modify your financial habits.

One way to start setting up your paycheck for better use: Pay yourself first. Prioritize your savings, then bills and discretionary expenses, in that order. The best thing about making a budget is that it can be adjusted according to how your needs and income change over time.

2. Adjust Your Income Tax Withholding

A nice, big tax refund is always one of the financial highlights of the year. But, it would serve you better dispersed throughout the year as part of your paycheck.

A large tax return means too much of your income is being taken from your paycheck each pay period, hence why it’s given back after the tax-filing season. By increasing your withholding adjustment on your W-4, you’ll have less money taken out and more money available to allocate month to month toward saving, investing and other necessities.

The bottom line: Don’t overpay the government in taxes — adjust your tax withholding so your paychecks can last longer.

3. Pay Down Debt

Paying off any existing debt you might have before allotting money to your savings is one of the best ways to use your paycheck. Are you making only minimum payments on your loans or credit cards? Have you missed some payments here and there? Either way, the penalty interest can prevent your paycheck from going as far as you might like.

There are a few schools of thought on paying down debt. The Debt Snowball Method, popularized by Dave Ramsey, recommends starting with the smallest balance and working your way up. Another perspective is to pay off the most expensive debt — the one with the highest interest rate — first.

Ultimately, everyone’s financial situation is different, so you’ll have to determine which approach works best for you and what you can afford.

4. Set Up Direct Deposits

If you’re prone to splurging and spending as soon as your paycheck is cashed, arrange with your employer to have part or all of your pay directly deposited into a savings account.

By direct depositing part of your paycheck, you automatically have savings set aside. Plus, you’re less likely to blow your paycheck. If you direct deposit all of your paycheck, be careful and deliberate about how much you transfer to your checking account to spend.

When choosing a direct deposit account, opt for a savings account that bears a higher interest rate so the money you deposit accrues valuable dividends. Later on, consider withdrawing some of that money to re-invest it into a certificate of deposit or perhaps even a mutual fund.

5. Start Building an Emergency Fund

Call it an emergency savings fund, a “rainy day” fund or a “worst-case scenario fund” — the bottom line is you need to set aside some money in case you get hit with an emergency.

An alarming number of people aren’t financially prepared for life’s surprises and don’t have enough in savings. In fact, a recent GOBankingRates.com survey found that 62 percent of Americans have less than $1,000 in savings. If these people find themselves hit with a medical emergency or even a costly car repair, they might be out of luck.

The size of your emergency fund doesn’t have to be more than $1,000, but you might want to consider having at least that much set aside. Ideally, you should aim to have a financial safety net that will keep you afloat for at least several months — a year, if possible.

6. Save for Retirement

Retiring without savings can leave you broke or struggling financially when you’re no longer in the workforce, so it’s important not to overlook a retirement fund. However, many people do.

Another GOBankingRates.com survey found that one in three Americans has $0 saved for retirement. Although it might not be surprising that more than 40 percent of millennials have $0 saved for retirement, nearly 30 percent of baby boomers (those age 55 and up) and 30 percent of Generation Xers (ages 35 to 54) don’t have any retirement savings either.

Look into getting a savings account designed for retirement, like a Roth IRA or 401k, through your employer. Save what’s feasible within your income, though, as saving too little — or even too much — can impact other financial priorities.

7. Treat Yourself

All saving and no spending makes earning a paycheck very dull indeed. But once you’ve taken care of everything on this list, like paying off debt and saving where appropriate, it’s OK to use the remainder of your paycheck for some discretionary spending.

However, don’t go crazy with your credit card. Instead, consider using cash or a debit card instead of a credit card to prevent the risk of overspending, racking up interest and going into debt.

Don’t be afraid to reward yourself every once in a while for being responsible with your money. Treat your paycheck plan like a diet: Stick with it, stay disciplined, and you’ll see and feel the results.

From GoBankingRates.com: 7 ways to make the most of every paycheck

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