How much do you have in savings? Are you able to cover an emergency if it came up? If you don't, you're not alone. According to Bankrate, the majority of Americans —as many as 60%—don't have enough money saved up to pay for a $1,000 expense if it came up at the last minute. That also means they don't have enough for future expenses or luxuries. But it doesn't have to be that way, especially if you follow this simple strategy: Pay yourself first.
The percentage of Americans that don't have enough money saved up to pay for a $1,000 expense if it came up at the last minute, according to Bankrate.
This golden rule is what can set you apart from people who have to scrape by every month. All it takes is a little dedication and a lot of discipline. But remember, you'll have to check your procrastination at the door. You won't be able to push it back, no matter how easy it may seem. Read on to find out the importance of this strategy and how to get started.
- Paying yourself first is one of the pillars of personal finance and considered the golden rule by many financial planners.
- You can pay yourself first by taking as little as $50 to $100 each payday and putting it into an investment vehicle like a savings or retirement account.
- Set aside the amount you've committed before doing anything with the rest of your money including groceries.
- Weigh out the options and financial implications of putting more to your savings than toward your debts.
What Does it Mean to Pay Yourself First?
Paying yourself first is one of the most common pieces of financial advice around. The concept is one of the pillars of personal finance and considered the golden rule by many financial planners. Not only do financial planners suggest it, but there are plenty of books that prescribe this strategy. It's probably very likely that your parents have given you this piece of advice, too.
The basic idea behind paying yourself first is simple to understand. By paying yourself first, you're basically socking away some cash for yourself, whether that's into a savings or retirement account. Do this before you do anything else: Before you pay your bills, buy groceries, give your kids their allowance, or buy that brand new TV. Make sure you 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, you probably won't even notice the withdrawal after a few months. Even if you start out with $50 a month, you're one step ahead of the game. You might even find you can increase the amount.
How to Pay Yourself First
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. 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? Are you hoping to go on a really nice vacation? Maybe you want to save up for your child's education. By paying yourself first, you're almost guaranteed to make sure that money is there when you need it. That means you won't have to scramble at the last minute.
Regular steady contributions are an excellent way to build a large nest egg. The first and most obvious, way to do that is to open up a savings account. You can do so by going to the bank where you hold your checking account. The main advantage of doing that is that you'll have easy access to make transfers or deposits as soon as you get paid. Some banks allow you to set up automatic transfers, so you can set them up each for each payday or once a month—whichever works for you. The other option is to look for an online bank. These generally offer higher interest rates than brick and mortar banks, and you lose the temptation to use the money when you do your regular banking.
Consider putting money aside for your retirement via a 401(K). If you have an employer-sponsored plan, it's the easiest way to do so. It gives you pre-tax deductions from your account, and many employers match your contributions so you'll get a little extra. If you don't have this option, speak to a financial advisor about the best options for you.
You can also check out certificates of deposit (CDs) which allow you to put your money aside for a set interest rate for a specific period of time. They can range from a few months to a few years. It's great if you have a sizable amount. But one thing to keep in mind about CDs is that they usually require a minimum deposit, and if you take your money out before maturity, you may not benefit from the interest.
It's All About Psychology
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 peace of mind. People with fat emergency funds tend to have fewer emergencies than those with lower or zero balances.
And remember, once you develop a routine, you're more likely to continue. If you're like most people, your mind craves structure and a sense of discipline, even if you live on the wild side once in a while. When you start saving every payday and stick to that routine, there's less of a chance that you'll stray. It's kind of like an actor learning her lines. The more she practices, the more likely it is that she'll remember them when opening day hits.
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 can set the money aside before you rationalize ways to spend it.
But don't forget about your liabilities. If you're swimming in credit card and personal loan debt, be practical. It's a good idea to try to get that all under control—or to even pay it off completely—before you commit to making a huge amount to your savings every month. Check the interest rate on your savings accounts versus how much you'll be spending in interest each month on your debt. If the debt far exceeds the savings, it's probably a wise move to consider paying off your obligations first. After all, you don't want your debt to eat up more money than you'll save.
The Bottom Line
Paying yourself first is truly the golden rule of personal finance. By using the technique, you can truly benefit over time. But it's important to be practical. If saving means you'll be paying more in interest on your financial obligations, it may not make sense to start right away. Do a financial checkup before you commit to a plan. It'll save you a lot of hassle and a lot of money in the long run.