We’ve all heard the financial advice, “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 the advice means.
The tip refers to saving some of your money before paying your bills.
Ideally, somebody would take the money out of your paycheck before seeing it and deposit it into an investment account. But unfortunately, if you don’t have the money in your checking account, you won’t be able to spend it.
It might seem that you could as quickly pay your bills and then save the leftover money, but in practice, that rarely works. What commonly happens is that your lifestyle expands to the amount in your bank account. You’ll pay your bills, and there will be nothing left.
You’ll find that you adjust your lifestyle accordingly and save money quickly by paying yourself first.
Using this process will help you pay yourself first:
1. Set up your automatic savings. You have two options: either have the money taken out of your paycheck or set up your checking account for automatic payment.
· Larger employers will allow you to have a part of your paycheck deposited directly into a separate account. It should be an investment account of some sort. For example, an ideal method might be a 401(k) or just a regular investment account.
· 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. For example, suppose your employer can divert part of your paycheck to another account. In that case, they can break it up further and send an amount of your money to your checking account, part to your investment account, and another part to a third account.
· If you’re self-employed, auto-debiting your checking account is the way.
2. There are challenges: psychological challenges. Most of us feel like we don’t make enough money to save anything. Rarely true. Most of us have expenses that we’re not willing to eliminate. 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 following 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!
· Consider adding that money to your savings whenever you pay off a debt. Then, keep making the payments; only now can you make them to yourself.
Paying yourself first is one of the most incredible things you can do for your financial future. The key is to get the money out of your hands as quickly as possible. Ideally, you’d never have possession of the funds in your checking account. Save automatically, and your retirement is practically assured! Get started today.