Is your paycheck actually keeping you from saving?

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Is your paycheck actually keeping you from saving?
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It’s probably safe to say that the words ‘pay day’ are like music to your ears.

Getting that paycheck means making money — money that pays the bills. But according to new research, it also means spending money that you could be saving.

Is your paycheck burning a hole in your pocket?

Back in the day, getting paid was more of a process — one that required a paper check, a trip to the bank and then maybe a couple of business days before workers could actually access the funds.

Read more: 9 ways to find free money

Now the process is immediate — and extremely convenient. So convenient, in fact, that workers can splurge on pay day without even having to check their bank account — knowing the money already went through overnight. 

And unfortunately, the convenience of direct deposit, mobile payments and constant swiping of plastic has caused people to form some pretty bad financial habits.

Regardless of workers’ income level, pay day is now associated with an increase in spending on discretionary goods and services — things like clothing, entertainment and restaurants — according to researchers Michaela Pagel, an assistant professor at Columbia University Business School, and Arna Vardardottir of the Copenhagen Business School.

“According to standard economic theory, people make financial plans and budgets, but our research shows that people don’t behave consistent with theory, especially on the day they receive their paychecks,” Pagel said.
 

Consumers spend 25% more on pay days

Do you ever get about halfway through the month and suddenly realize you’ve spent way too much money to keep your monthly budget on track? Your pay day habits may be part of the problem.

According to the researchers, for many people, pay day has become like a license to spend. 

After studying consumers’ electronic payments, the researchers found that more than half of Americans increase their spending on pay day by more than 25%. On days people get paid, they’re more likely to go shopping — and then comes the ripple effect — they end up spending more than they had planned.

And apparently this trend is no secret. Stores know when you’re more likely to spend more money — so they increase prices. For example, researchers say grocery stores have been known to boost prices at the beginning of the month, ‘capturing an enlarged slice of consumers’ end-of-month paychecks.’ And instead of putting any extra pay-day cash into savings, consumers are splurging on unnecessary purchases instead.

Read more: 4 ways to trick yourself into saving more money
 

How to reverse the trend

Buying an expensive coffee here and there may not be a big deal, but if you’re spending a lot of extra money every time you get paid (on things you don’t need), it’s keeping you from seeing just how much you could really be saving.

For a lot of people, pay day spending is often caused by a lack of cash on hand. If you don’t have money set aside in savings, that paycheck is your only source of cash. And if you don’t take steps to reverse the trend, you’ll never be able to stop living paycheck to paycheck.

Turn that extra spending into savings

Setting up a portion of your paycheck to automatically go into a savings account is a great way to build your savings — plus, it keeps you from spending that extra cash on pay day. You want that money to go straight into an account that is just a little bit out of reach. That will prevent you from dipping into savings for any little thing — so the money will be there in case of an emergency or other event when you really need it (think medical emergency, job loss, big purchase etc.).

Figure out how much of your paycheck you need to cover the essentials — mortgage/rent, bills, food, extra spending (don’t go crazy there — keep in mind what the goal is). Then set up your direct deposit so any extra cash over that amount goes directly into savings.

Read more: Best solutions for automatic savings

When it comes to savings, figure out what your goals are and then you should be saving for each one separately. If you’re putting money aside to buy a house, that money shouldn’t be the same as your emergency savings, which you might need to live on in case of something like a job loss or health issue.

Here are a few ways to jump-start your savings:

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Alex Thomas Sadler About the author:
Alex Thomas Sadler is the Managing Editor of Clark.com and Clark Howard Digital Products. Alex is also the host of Common Cents, a new Clark.com series that makes money simple, so you can better understand and take control of your own financial life. Alex graduated from the University of Georgia with bachelor's degrees in ...Read more
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