Paying Yourself First
The concept of paying yourself first is a common idea in many financial advice books, but it is not universally understood or implemented. The theory of paying yourself first is the idea that if you put money into savings before you do anything else with your paycheck, you will be able to consistently put something away each month, which will build and build over time, eventually creating a significant savings without much thought.
Many people are of the mindset that they don’t make enough to put anything into savings on a regular basis. The idea behind paying yourself first is that if you pay yourself first, you have no choice but to save. When you organize your list of payers this way, you might be surprised how you are still able to pay all of your bills without trouble.
Just how much you should pay yourself depends on who you ask. This number can range from 1%, 5%, 10% or higher. Most advice you will find simply suggests you select the largest percentage that is reasonable for you without creating a financial burden on your monthly expenses.
If your paycheck arrives electronically from your employer, you can likely log into your company’s payment system and designate for a certain percentage to automatically go into savings each month. The benefit of doing this is that then your paycheck deposit will already have the savings amount deducted and the money deposited from your paycheck will be the remainder you can spend.
If your employer doesn’t have this capability, most banks have an option to set up an automatic transfer that you can set to move from your checking account to your savings account. Again, this automation removes your ability to decide whether you can afford to put something into savings each month.
If you think you would be tempted to move money from your savings to your checking account when your checking account balance gets low, one easy way to reduce that temptation is to open a savings account at a different bank than where you have your checking account. In today’s modern world, it is usually still possible to move money between banks, but usually there is a couple of days wait, and sometimes even a fee, which will deter you from moving money with any regularity.
Once you have paid yourself, next you pay your monthly expenses. These might be rent, a mortgage, student loans, phone bills etc…Once those are paid, then what’s left goes to food, entertainment, clothing, whatever else you might want to buy. When expenses are paid in this order, you will quickly find that you are still able to pay all of your bills and participate in the leisure activities you choose.
Often, your spending habits are based on the balance of your account. The more you have in your account, the more you will spend. Thus, if you pay yourself first, you will remove the temptation to spend that money.
Try it out and let us know how it goes!