We’ve all heard the saying, “Pay yourself first,” more times than we can probably count. Many experts consider this to be the most important financial tip in existence, but let’s consider what this advice really means.
This tip refers to the practice of saving some of your money before you pay any of your bills.
It might seem that you could just as easily pay your bills and then save the money that is leftover, but in practice, that rarely works. What commonly happens is your lifestyle expands to the amount in your bank account. You’ll pay your bills, and there will be nothing left.
By paying yourself first, you’ll find that you adjust your lifestyle accordingly and save money easily.
Using this process will help you pay yourself first:
1. Set up your automatic savings. You really have two options: either have the money taken out of your paycheck or have your checking account set up for an automatic payment.
Larger employers will allow you to have a part of your paycheck deposited directly into a separate account. This should be an investment account of some sort. It might be a 401(k) or just a regular investment account. This is the ideal method.
You can also set up your checking account to auto-pay a set amount on a specific date every month. Similarly, you could have your investment account auto-debit the amount each month. Either method accomplishes the same thing. Just be sure not to spend the money before your savings ‘bill’ gets paid.
Keep in mind that you can do this with multiple accounts. If your employer can divert part of your paycheck to another account, they can break it up further and send part of your money to your checking account, part to your investment account, and another part to a third account.
If you’re self-employed, then the method of auto-debiting your checking account is the way to go.
2. There are challenges: psychological challenges. Most of us feel like we simply don’t make enough money to save anything. This is rarely true. In reality, most of us simply have expenses that we’re not willing to do without. Examine your spending and see if you can free up some funds.
Another solution is to start saving 1%. You won’t miss 1% of your paycheck. The next month save 2%. Keep increasing the amount for as long as you can. You’re doing pretty well if you can get up to 10%. You’re doing great if you can get up to 20% or more!
Whenever you pay off a debt, consider adding that money to your savings. Simply keep making the payments, only now you can make them to yourself.
Paying yourself first is one of the greatest things you can do for your financial future.
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