Why Paying Yourself First Pays Off
You may have heard the phrase “Pay Yourself First” when it comes to money and budgeting, but do you actually know what it means and how to get it done?
When I first started making savings a priority, I was paying myself first, but the funny thing is, I didn’t even know it! As time went on, I saw my savings grow and grow and with some work and effort, I significantly strengthened my financial state. Here’s how I did it.
When you’re making your budget, add together your monthly expenses like your rent or mortgage, utilities, phone, cable, etc., then subtract the total from your monthly income to see what you have left at the end of each month. Based on the amount you have left, decide how much of it you want to add into savings and then stick that amount in your monthly expense list. That’s right, you want to treat your savings like an expense. Even though you don’t technically have to pay for it, when it’s in your budget as an expense, it makes it easier to stay on track.
A budget means absolutely nothing if you don’t stick to it. You know what your income is, how much is coming out from expenses and what you have left at the end of every month. Now, start tracking your spending. Jot down what you spend your money on each week. When you add it up, all of your spending should be within your budget.
Now that you know your budget and you know how much you can afford to save, how exactly do you pay yourself first? Well, how often do you have income coming in? If you get paid each week, divide your monthly savings goal by four. The amount you get from that equation is the amount of money you want to transfer into your savings account after you receive each weekly pay check. At the end of the month, you’ve typically received four pay checks, so you will automatically have the amount of money you budgeted to save each month in your savings account! If you get paid bi-weekly, divide your monthly savings goal amount by two, and after each pay check, put that amount into your savings account. With each pay check, you pay yourself before any other bill or obligation.
To make it easier to understand, take a look at this example:
- Let’s say your goal is to save $100 each month. In your monthly budget, $100 should be allocated to your savings. You get paid bi-weekly, so $50 from each pay check goes to your savings account before anything else get paid. And after it’s put in there, don’t touch it. At the end of the month, you’ll reach your $100 savings goal with two pay checks. This means that at the end of each year, you’ll have saved $1,200 automatically by paying yourself first.
There are some good tools you can use in order to make this even simpler.
- Set up automatic transfers within online banking. Say you get paid every Friday. You can set up your account to automatically transfer money into your savings account every Friday of each week. This is especially easy if you have direct deposit because your pay check is automatically deposited into your account on pay day. If you don’t have direct deposit but want to set up automatic transfers, deposit your check a couple of days before the transfer date you set. That way, you will be sure the money scheduled to transfer is actually in your account.
- A second tool is to split up your direct deposit. Say your paycheck is $600 and out of that, you want to put in $120 into your savings account. You can set up your direct deposit so that $120 is put into your savings account and the remaining $480 goes into your checking account. You won’t even have to lift a finger.
When you stick to your budget and take advantage of the different tools available to you, paying yourself first is simple, and even better, it really helps you save money without ever feeling like you’re doing any extra work.
Do you pay yourself first? Got any tips on how to get it done? Let us know in the comments below!