Exactly what does it mean to pay yourself first? Overall, it means that your top priority should be to put a certain amount of money into your savings and/or investment accounts before you pay your monthly expenses, such as your rent or mortgage payment, car payment, student loan payment and so forth.
This could help you prioritize your financial well-being and help ensure that you don’t splurge on unnecessary items rather than saving for your future.
Another good idea is to contrast this strategy with one where you take care of monthly bills first then decide if you have enough money left over to put into your savings. If so, how much? For some people, the amount saved or invested using this strategy may end up being little to none.
If the “pay yourself first” strategy appeals to you, and you don’t feel as though there are any roadblocks, it could be a great place to start. One way to get started is to take a look at your budget, determine how much you can put away and set up automatic transfers.
Then you might want to review your budget periodically to see if you can increase the amount you’re paying yourself. If the strategy appeals to you but you’d like more guidance about how paying yourself first works, read on!
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It may help to know that plenty of financial planners believe in this approach, as it is one approach that can help you build a nice nest egg. Some finance professionals even call the pay yourself first strategy the golden rule.
The beauty of this approach is that it focuses on consistent, prioritized savings and investment, along with a frugal mindset, which could give you the freedom to ultimately put your money where it matters most to you.
To get started, it could help to brainstorm how much you’d like to save and what you would do with that money.
You might, for example, want to put a certain amount of money aside for things like a down payment on a house or to help your children attend college. Or you may want to travel.
Everyone has unique savings and investment goals, and it’s helpful to be clear about your own — then you could use those goals as motivation to consistently pay yourself first.
Because some of the bigger savings goals may take a while to achieve, it could help to also have shorter-term goals to keep yourself motivated.
Your shorter-term goal, for example, might be to put enough away in savings to cover a month’s worth of expenses — and then three months, and then six months. Or you may want to save to buy a new car.
A look at spending
If saving enough money seems challenging to you, then it might help to take an honest look at your spending habits. Maybe you find yourself making impulse purchases when you’re feeling stressed. If so, know that you’re not alone when indulging in some retail therapy.
In fact, according to Credit Karma, more than half of the people they surveyed in the United States said they use shopping to deal with stress — and, let’s face it, online shopping makes it super easy to buy, no matter the weather or time of day.
If you only rarely indulge in impulse shopping, and the dollar amounts are within your means, then this isn’t likely to cause significant harm. But, if this becomes a habit, crossing over into compulsive spending, then this could have a serious impact on your financial well-being.
If you believe that you’re not achieving savings goals because of overspending, then it could make sense to address that issue first. According to Experian.com, it might help to identify your emotional triggers and then avoid shopping during those times.
If you aren’t yet sure what those triggers are, you could track impulse purchases and reverse engineer when you’re more likely to spend too much. Perhaps it’s after a long day at work or when you’re worried about something.
As another strategy, if you’re not sure whether something fits into your budget, you could wait a couple days before making a buying decision or call a friend when you’re feeling the urge to shop.
Here’s another potential challenge: FOMO spending — the fear of missing out. In 2018, Qualtrics and Credit Karma discovered that nearly 40% of Americans ages 18 to 34 said that they’d gone into debt because they wanted to keep up with the lifestyles of their friends.
If that feels familiar to you, there are strategies to help conquer FOMO spending. You could brainstorm free alternatives to high-cost plans a friend might suggest. When is a local art museum, for example, offering a free community day? What movie can you get from the library and invite friends to watch with you? What about a hike in the local park system?
If you find that FOMO kicks in when you have your credit or debit card handy, you might want to only carry cash when you go out to your favorite restaurant, bar, or shop. And if ads and posts on social media cause you to want to shop, you could reduce your time on Instagram, Facebook, Twitter and the like.
Here’s another strategy you could consider: If you’re tempted to put a discretionary purchase on your credit card, you could use SoFi’s credit card interest calculator to see how much interest you might really pay on that impulse buy. The amount might shock you and cause you to put the item down and walk away.
Before you can realistically know how much money you can pay yourself first with, you might need to be confident in your budget. Although the word “budget” can have a negative connotation, it’s really a way to take control of your money to make sure you’re saving and spending in a way that meshes with your wants and needs, dreams and goals.
By tracking your spending for a period of time, say 30 days (or more), you might get a good sense of where your money is going. You could create a list of your monthly expenses, including your rent or mortgage payment, car payment, credit card payments, student loan payments and more.
You might also consider listing what you pay for your utilities, cell phone, groceries and so forth, along with discretionary purchases, in order to see a more complete picture of monthly costs.
Ideally, when you add these up, you’ll be spending less than what you earn, and you could use that information to help determine how much you can potentially deduct from your paycheck and put into savings or investment accounts.
If, through this process, you discover that you’re not currently living within your means, or that you aren’t able to save as much as you’d like, then one good idea is to see where you can trim expenses. You may also consider ways to grow your income, whether that means asking for a raise or picking up a side gig.
Starting to pay yourself first
As a first step in paying yourself first, it may make sense to create an emergency savings account if you don’t already have one or if it needs an extra infusion of cash.
That way, if your car or HVAC system breaks down or you have unexpected medical bills, you’ll have cash to help address the situation without simply relying on high-interest credit cards or other forms of debt.
Conventional wisdom suggests an emergency account that contains three to six months’ worth of basic living expenses, put into an account that’s accessible at any time.
Then you could move on to saving for other short- and long-term goals, including but not limited to saving for retirement.
When trying to determine how much money you should pay yourself first in the beginning, one good idea is to start with a small amount and then incrementally increase it until you reach your goals.
Or it might make sense to determine how much you’ll need for your goals and reverse engineer how much you’ll need to put away to reach them in a certain time frame.
Also, if you receive a bonus or inherit money, you could consider putting all of the additional money into a savings or investment account. You could do the same if you get a raise.
Paths to saving money fast
If you are looking to kickstart your savings and build it up fast, there are several strategies you might consider. You may choose to review your expenses and get rid of unnecessary ones.
What online subscriptions and streaming services are you paying for? Are you using them? If you review an entire month’s worth of debits from your account, how many do you see that are discretionary, ones you could live without?
Once you’ve eliminated some expenses, you could consider adding that combined dollar amount to the money you’re sending directly to your savings account. Even if the amounts, overall, are small, over time they can really add up.
Sometimes, if you owe a monthly payment to a company, they’ll give you a discounted rate if you set up auto pay and have your payment automatically deducted from your account. This could help to assure the company that the bill will be paid on the due date. Meanwhile, you could benefit from a discount and the convenience of not having to manually pay the bill each month.
This may help you avoid late fees, as well, but you might want to be cautious. If you don’t have enough money in your account on the day the bill is due to be deducted, you might be charged additional fees, such as an overdraft fee by your bank.
What about going on a spending fast? You might, for example, pick a day or two of the week when you don’t spend any money outside of what it takes you to get to and from work.
You could also consider other cost-saving ideas like packing your lunch, skipping the stop at the coffee shop and getting your book from the library on the way home, not from the bookstore. Besides saving you money on your “fasting” days, employing these strategies may help you to pay more attention to discretionary spending on the other days.
Also, you might want to review your bank accounts. Are you getting as much interest as you can, given that the average rate for savings accounts is considered pretty low, historically speaking? What fees does your bank charge? Have you shopped around to see if you could get a better deal?
Here’s another strategy you may want to consider as a tool to help with overspending: the 30-day rule. It has two parts and, combined, the rule might help you save money more quickly. In the first half, if you’re tempted to buy anything outside of what’s necessary to meet basic needs, then you write down what you want to buy, how much it costs, where you saw it and the date.
Then you could give yourself 30 days to think about whether you really want to buy this item. If, after 30 days has gone by, you still want to make that purchase, you could price shop it and then buy the item.
As an added twist, you could take the amount of the item and put those dollars in your savings account. Then, when 30 days has passed, you could weigh whether you’d be happier having more money in your savings or with making this purchase.
If it’s the former, then you have more savings built up. If you still want the item, you could withdraw the money from your savings, rather than putting it on a credit card.
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