What is Pay Yourself First?
“Pay Yourself first” is a phrase used for personal finance that means automatically routing a specified savings contribution from each paycheck at the time it’s received to your savings or investment account. In other words, paying yourself before you begin paying your monthly bills and expenses.
The Basics of Paying Yourself First
The concept of “paying yourself first” is a very effective way to ensure you continue making your savings contributions month after month. It removes any temptation to skip a contribution and spending the money on expenses other than saving. Consistent savings contributions go a long way in building your savings account and creating financial security.
Where Does “Pay Yourself First” Money Go?
In using the “pay yourself first” method, you may opt to put your money in a range of different savings vehicles, depending on your financial objective. You may prefer to put a certain percentage of your paycheck into a retirement account, such as a 401 (k) or an IRA. Or your may choose to put the funds into a cash savings account. Paying yourself first simply involves building your retirement savings, creating an emergency fund, saving for a large expense, or any other long-term savings.
Tips for “Paying Yourself First”
Figure out how much you can afford to save
If you haven’t already, create a budget and track your expenses, then figure out how much you can afford to put away each pay period. By creating a budget, you can take a closer look at your expenses and find areas to make small changes to your spending habits. For example, bringing your lunch to work or making less frequent stops to the salon, could create big savings over time.
Set your personal payment goal
If you find that you are only able to save a small amount now, look for opportunities to save more in the future. For example, you may want to focus on paying off your debt first, and then as you pay things off you can start to increase your savings contribution.
Create your savings strategy
Once you decide how much you can afford to “pay yourself first”, it’s important to decide on the best strategy to save it. You can start by moving your money to a savings account. There are two easy ways to do this. The first way is to split your direct deposit and have a percentage or set amount deposited into your savings account. Another option is to setup automatic transfers from your checking account to your savings account each pay period.
Its very important that you stay consistent and treat the money you’ve saved as if its off-limits, except for its intended purpose or a true financial emergency.