You have likely heard the importance of saving money for everything from retirement, buying a home, or making regular purchases. You probably know that a budget is the best way to track all the money coming in and going out. However, many budgets focus on paying expenses and then putting something into your savings account.
Going with a pay-yourself-first mentality means you set funds into savings before doing anything else with the money.
How To Start Paying Yourself First
If you have never followed the pay-yourself-first rule, there are a few things you should know before you get started.
First, it’s best to find out how much money you can afford to set aside for each pay period. This will depend on your income and your expenses. Once you have a number in mind, make sure that you actually put that money into savings or investments before you spend it on anything else.
The important thing is to make sure that the money actually ends up in savings.
If you have trouble sticking to the pay-yourself-first rule, there are a few things you can do to make it easier:
Understanding What Paying Yourself First Looks Like
“Paying yourself first” means making saving and investing a priority over spending. It’s a simple rule that can help you stay on track with your long-term financial goals.
Paying yourself first is a type of reverse budgeting, where your spending is built around how much you were able to put into savings. Perhaps you put a certain percentage of your paycheck into retirement and then pay your expenses.
While it helps you prioritize saving, it does not take away from your necessary spending. It can even help you build an emergency fund. If you have never followed the pay-yourself-first rule, there are a few ways you can get started.
You could leverage your life insurance policy through a life settlement. Selling it can be a great financial plan as well. If you no longer need it, don’t just let it lapse, since you won’t get the funds. Instead, you might want to sell your term life insurance policy and round out your savings.
Consider Savings Goals
Come up with a list of your savings goals, whether that is creating an emergency fund or building up retirement savings. Be specific. Instead of having a large goal of becoming financially independent, determine the steps to get there and focus on those.
Once you have your savings goals in check, you will be able to put aside funds for other things, such as travel or home repairs. You have a couple of options. You might put a little toward each goal, or you may focus on a few, concurrently. Then decide on the amount you will need to reach each goal.
Needs Vs. Wants
One of the most difficult things about paying yourself first is learning to differentiate between needs and wants. This can help you make wiser choices with your spending.
Some of the items on your pay yourself first list may be things that you want, but they are not essential. For instance, you may have a goal of taking a trip to Italy. This is not something you need, but it is something that will make you happy.
On the other hand, there are things that you need in order to live a comfortable life. These items should take priority over wants. For example, you need a place to live, food to eat, and clothes to wear.
Look At Your Current Spending Habits
You need to know how much you are spending so you know how much you can afford to put into savings. Look over credit card and bank statements to get an idea. You will be able to increase your savings later if you find you have been too conservative, but you don’t want to put so much into savings that your checking account doesn’t have enough to cover your expenses. That could result in a bounced check.
Figure Out How Much You Should Pay Yourself
You can use the 50/30/20 rule when it comes to budgeting. This would put about 20 percent of your income toward savings, 30 percent to wants, and 50 percent to needs. If your monthly income was $4,000, you would put $2,000 toward living expenses, $400 into savings, and the rest to wants.
The next step would be to automate your savings as much as possible. It could mean having that $400 automatically deposited into your savings account as soon as your paycheck hits your bank account. Or it could mean setting up automatic transfers from your checking account to your savings account each week or month.
You don’t need a lot of money to get started with the pay-yourself-first rule. You could start with $50 from each paycheck, especially if your paychecks are small. Once you get used to it, you could increase the amount.
Benefits Of Paying Yourself First
Paying yourself first can help you reach your financial goals for several reasons:
- It puts saving and investing ahead of spending, so you’re less likely to fritter away your money on unnecessary things.
- It forces you to pay attention to your finances and make saving a priority.
- It can help you build up a nest egg more quickly since you’re making regular contributions to your savings.
- It can help you become more disciplined in your spending.
- It can make it easier to stick to a budget since you’re already setting aside money for savings each month.
Paying yourself first is a simple concept, but it can be difficult to implement if you’re not used to saving regularly. However, once you get into the habit of paying yourself first, it will become second nature. And you’ll be well on your way to reaching your financial goals.
If you’re going to be successful paying yourself first, start with a small goal, like $50 per paycheck. Place the funds in a separate account and repeat no matter what might happen. Over time, saving money will become second nature, at which time you can increase it. The pay-yourself-first method might not be for everyone, but if you want to focus on savings, it is worth considering.