Have you ever heard the phrase “pay yourself first” and wondered exactly what it meant? It’s mentioned quite often in the world of personal finance because it’s a money management principle that can lead you to wealth.
As we’ve reviewed, many people, especially members of Gen Y, have difficulty saving money. You’re probably tempted to spend your money at least five to ten times a day, if not more. We have a lot of things we want to do, and typically, not enough money to afford it.
Well, it doesn’t have to be that way. That’s why you should make paying yourself first a priority.
What difference does it make to pay yourself first?
Let’s go back to the basics for a second. To pay yourself first simply means to treat your savings like a non-negotiable bill. It’s like making your monthly rent or mortgage payment, or paying for your cell phone service. You want access to a house and phone, and you know that paying your bills late (or not at all) has severe consequences. So you make room in your budget for those bills and you pay them.
You should treat your savings the same way. Why? When you’re faced with so many spending temptations and other social obligations, it can be extremely easy to reach the end of the month with no money left.
This is where living paycheck-to-paycheck gets in the way, but paying yourself first can break that cycle. Here’s how it works.
How to pay yourself first
To start, you simply need to know how much money you can afford to save. So we’re assuming you’re not in the red each month, and that you have some money to spare to go toward savings. (If you don’t, there are plenty of strategies you can use to increase your savings or income.)
How do you figure out how much to pay yourself? Start with some form of budgeting. It doesn’t have to be an overly involved budget, but you need to know your total amount of income and expenses for the month so you can subtract the two to see how much is left.
Once you have that number, leave yourself room for error just in case something else pops up during the month. With your final savings number in hand, go to your online bank account and set up an automatic transfer from your checking to your savings for this amount at the beginning of the month (depending on when you get paid).
By doing this, you’re guaranteeing you’ll put money away before life can wreck havoc on your plans, as it inevitably does. You’ll no longer reach the end of the month wishing you hadn’t spent your money on X, Y, or Z. Instead, you’ll be building up your cash reserves for one of your financial goals!
Another easy way to incorporate paying yourself first into your financial plan is to use a zero-sum budget. Popular personal finance guru Dave Ramsey made this budgeting method well-known, and it involves giving all of your money – every last penny – a job.
What that means is if you’re earning $2,500 per month, and your expenses total $2,100, you need to figure out what to do with the remaining $400. You can choose to save it all, split it 50/50 between fun and savings, or change it up each month.
The point is to give all of your money a purpose. It’s not about deprivation at all; it only serves to increase awareness of your financial situation so you can take more control.
Start thinking of your savings as a bill
This is the easiest way to shift into this savings mindset. View your savings as a bill you must pay to yourself each month to ensure a secure financial future.
Whether you’re saving for an emergency fund, a down payment on a house or a car, a vacation, or a dog, paying yourself first will work wonders if your paychecks normally slip through your fingers.
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