Why should I pay myself first?

By Aaron Levitt AAA
A:

The concept of "paying yourself first" is one of the pillars of personal finance and considered the golden rule by many financial planners. The basic idea is simple to understand. As soon as you get paid, put money into your savings account first. Before you pay your bills or buy groceries, set aside a portion of your income to save. Thinking of personal savings as the first bill you must pay each month can really help you build tremendous wealth over time. By starting with a small amount like $100 each payday and using automatic payroll deductions, after a few months, you probably won't even notice the withdrawal. You might even find you can increase the amount.
There are plenty of benefits from choosing to "pay yourself first" and prioritizing savings. First, there's the obvious one about building a huge savings balance. Regular steady contributions are an excellent way to build a large nest egg. That's money you can use in case of emergencies, to purchase a home or save for retirement via a 401(K). Paying yourself first is also an excellent way to pay for planned larger purchases. Do you need new tires for your car in six months? By paying yourself first, you're almost guaranteed to make sure that money is there when you need it. There's no scrambling at the last minute.

Then there is the psychological aspect. Building savings is a powerful motivator and there are plenty of mental benefits to seeing your savings balance grow and grow. When you prioritize savings, you're telling yourself that your future is the most important thing to you, not the cable company. While money may not buy happiness, it can provide piece of mind. People with fat emergency funds tend to have fewer emergencies than those with lower or zero balances.

Finally, paying yourself first encourages sound fiscal habits. By moving savings to the front of the line ahead of spending, you have a better grasp on the role of opportunity costs and how they affect your choices. By automatically deducting a portion of your income, you're able to set the money aside before you rationalize ways to spend it.

The bottom line is "paying yourself first" truly is the golden rule of personal finance. By using the technique, you can truly benefit over the long run.

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