There is one thing you can do for your finances that can have a major impact on your life. This one thing helps you save more money, spend less, and be better prepared for the future. The one thing that lets you do all that is quite simple – pay yourself first.
Saving money is great. It’s a hallmark of personal finance. This is not that. Paying yourself first is a mindset and takes your finances to the next level. In fact, this is one of the top habits of the rich. Paying yourself first may sound difficult, but it’s actually quite easy to do.
What Does it Mean to Pay Yourself First?
What does it mean to pay yourself first? Essentially, paying yourself first simply means that you automatically save or invest a percentage of your earnings before you pay your expenses. In fact, it’s the first thing you do once you receive each paycheck.
When you pay yourself first, you put money in a savings account for a long-term need or a retirement account such as a 401(k) or an IRA. This isn’t money you plan on spending in the near future. Instead, it’s money you’re using to build long-term wealth.
You may think that’s counterintuitive to the idea of saving money. Why would we save money that we can’t access if we need it? The reality is that many Americans don’t save for retirement and can’t handle a $400 emergency.
By paying yourself first, you’re getting ahead of the average American and setting yourself up for a better future.
Why Should You Pay Yourself First?
Why should you pay yourself first? While saving money every month on items you need is great no matter how you do it, there are some significant benefits with the pay yourself first method.
It’s Easy to Do
First, paying yourself first is easy to do. In fact, it’s easier to do than that savings challenge you’re considering for 2022. Many banks and online brokerages allow you to automate deposits, and they typically only require you to fill out a simple form to begin.
At first, it may sting a little bit to notice less money coming in with each paycheck than before. However, after a while, you won’t even notice the fact that you’re saving money automatically, but your savings accounts will.
You may even forget that the money is being taken out, which is even better. That means that you’re no longer missing that piece of your paycheck, and that’s when savings becomes even easier.
It Gets Your Priorities in Order
What are your priorities right now? Are your priorities to work long hours, pay bills, and treat yourself every now and then? Do you save money all year just so you can take a vacation with your family?
While there is nothing wrong with taking care of your household, making sure your bills are paid, and treating yourself occasionally, there is more to life than that.
When you pay yourself first, you set your priorities not only for right now, but for the future as well. In fact, you view your future self as a bill to pay. Wealth building doesn’t happen by chance or accident.
It takes focus to save for retirement. It is possible to set intentions and work towards having a retirement nest egg, and that starts with you paying yourself first. So, if one of your priorities is to retire well, or even retire early, this is the way to do it.
It Focuses on Discipline
Learning how to pay yourself first is like learning a new habit. It may be scary at first, but eventually, you get the hang of it. Then you need discipline to keep going.
When you find yourself saving more and more money over time, you’re more likely to focus on ways to cut your costs down or increase your earnings so you can save more.
The most important thing to remember is that, like any habit, paying yourself first takes time and effort. While it is easy to do, sometimes you just won’t want to do it. And that’s okay. In those times, though, it’s important to remember why you’re saving and investing your money.
How to Pay Yourself First
Now that you know why you should be paying yourself first, let’s talk about how. While starting is already easy, there are a few ways to make it even easier.
Know Your Income and Expenses
Do you know what you have coming in and going out on a regular basis? Do you know how much money you spend during a regular day, week, and month?
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When you know what you have coming in and going out, you can then decide where to start on your savings journey.
Create a Budget
Now that you know what’s coming in and what’s going out, you can create a budget. Even though you’ll be taking money at the beginning when you pay yourself first, having a budget is still important.
Why have a budget? It’s simple. The more you understand your finances, the more you can tweak it and make it work for you. Think about it this way — if you could cut something out of your budget that you wouldn’t miss to save more money, would you?
By creating a budget, you’re putting your plans to paper and giving yourself the opportunity to reduce expenses to increase your savings. This is helpful to do as it gives you a better idea of how much you should pay yourself with each paycheck.
It also give you insight to determine how much you’d like to pay yourself with each paycheck.
Set a Goal
People set goals and resolutions every year, and many people set goals for everything except saving for their future. But you can set a goal when it comes to paying yourself first, too.
Let’s say you’ve created your budget and you know that you will start paying yourself three percent each paycheck. Could you stretch that to five percent in the next six months? Maybe even ten percent? Determining how much you should pay yourself takes some time, but don’t be afraid to stretch yourself.
By setting goals, you’re more likely to actually work towards, and even surpass, them.
If you want to push yourself a bit further and make sure you reach your goals, get a little competitive. Set goals with dates, and when you reach them, treat yourself. Or, enlist your significant other, a family member, or another accountability partner, and see who can increase their savings the fastest.
A little competition never hurts, and it will keep you honest and accountable with your goals.
Out of sight, out of mind, right? When you first start paying yourself first, it may seem like that money is disappearing, but it’s not.
Instead, it’s being saved and invested in your future. But when you first start paying yourself first, it may sting a little to see that extra money going somewhere else instead of into your pocket.
To prevent yourself from sabotaging your financial goals, transfer the money into an account that you can’t easily access. If your employer allows you to do this automatically, great.
If not, you can always get a separate bank account through a bank like CIT Bank, so you can transfer your money as soon as you get paid. CIT Bank pays .40 percent in their Savings Builder account.
You just need to start the account with at least $100 and deposit $100 per month to earn that rate.
After creating and looking at your budget, you may only be able to save $100 a paycheck when you first start paying yourself first. That’s okay!
Don’t be afraid to start small, because even a few dollars here and there can add up to significant savings. Just saving $25 a week could mean an extra $1,300 a year. There are many ways you can come up with an extra $25 per week, so it’s not that difficult.
Track Your Spending
When you track your spending, you’ll know if you’re spending the extra money you have coming in. While sometimes it’s necessary to spend more (like during an emergency), it’s also important not to allow lifestyle creep to disrupt your plans to pay yourself first.
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Lifestyle creep happens to the best of us, and sometimes that can hinder our savings progress. It’s hard to be extremely frugal all of the time. However, instead of increasing your lifestyle when you get a raise, bonus, or earn more money from your side hustle, make sure you use that extra money to pay yourself first.
Although tracking your spending sounds difficult, it’s pretty easy. You simply write down everything you spend. This gives you a place to examine your spending so you can find savings opportunities.
Tiller is a great tool that automates much of this for you. They pull your bank information into a categorized Google Sheet to help you find those needless expenses.
The whole point in learning how to pay yourself first is to use that money to invest in your future. You can’t do that if you’re constantly dipping into it.
This is why it’s handy to have this money in a separate bank account. You should have a regular emergency fund that you use for unexpected expenses. Having the two separate accounts means you won’t have to dip into your pay yourself first funds in the event of an emergency.
So, is it wise to pay yourself first? Absolutely! You want a comfortable future. Retirement is on your to-do list, or at least living life on your terms. You want to be able to say no to the things that don’t bring you joy.
When you pay yourself first, you are creating those opportunities for yourself. It doesn’t have to be hard or complicated. In fact, it’s quite easy. The key is to just start. Because anything is possible when you believe in and take care of yourself.
What do you do to pay yourself first? How much of your finances do you have automated? What are some other financial habits you think are simple that have a significant impact on your livelihood?