You have plans to increase your monthly retirement contributions, but as you receive your paycheck, you never quite got around to it. However, you promise yourself to add something extra the next month unfailingly. And when the next paycheck comes around….
Sounds familiar? You are not alone.
The problem is that once you get paid, you start to pay for things which seem critical – rent, utility bills, groceries and maybe a few nights out. By the time you come around to sending money to your retirement account as planned or beefing up your emergency funds, there’s little or nothing left.
What this obviously shows is that you do not pay yourself first. Mind you, buying the trendy mink coat doesn’t count as paying yourself. Paying yourself first simply means to set money aside from your paycheck as savings before you start to spend it.
Experts consider this concept of paying yourself first as the foundation of personal finance.
So, why is it vital that you pay yourself first?
The idea is to ensure you meet your financial goals (hopefully, you have one). This could include saving up for retirement, ramping up your emergency funds, or saving for a down payment for a new home. Whatever your objectives are, you must make sure you have them covered before you spend a dime on any other thing.
This means you have to make a radical change and adopt the habit of paying yourself first. And this, even for the most astute of money, is by no means easy.
Here is Why You Need to Pay Yourself First
This strategy has been around for a long time. But the reality is that not many people are doing it. According to a recent survey by Bankrate, only 29% of Americans have enough money saved up to cover six months of living expenses. And an alarming 23% do not have any savings at all. In yet another study, only 18 of respondents are sure they have enough money saved for retirement.
Coupled with the fact that not all employers apart from the government pay a pension to their staff, it’s clear that your retirement savings are solely your responsibility.
Yet, this fact is not enough to drive people to action.
Let’s face it: there are a thousand and one things your paycheck is supposed to cover. This day-to-day expenses and general cost of living are behind most failed attempts at building your savings.
Once you get paid, there seems to be no shortage of wants and needs, all requiring money to be fulfilled. And sometimes, you even begin to look forward to the next paycheck two weeks down the line.
Paying yourself first is a sure, and an obvious way to build huge savings.
These savings will come in handy when you’re faced with an emergency or any other unplanned expenses. You can also use the money from these savings as a down payment for a new home or take care of yourself in retirement.
Stacking up a healthy stash of cash is also an excellent way to take care of planned substantial expenses. Say a holiday in the exotic Bahama islands or an escapade in Iceland. By paying yourself first, you ensure there’s always some cash when you need it – no need to start panicking whenever a need arises.
The savings you build is a powerful motivator. There are mental benefits of seeing your savings balance increase before your very eyes.
Prioritizing your savings is a way of telling yourself that your future is important to you. Then there’s this peace of mind that comes with knowing that you have a reasonable amount of money stacked up somewhere.
And ironically, people with large emergency funds tend to have fewer emergencies than those with zero or paltry balances.
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So How Do You Go About Paying Yourself First?
You must become intentional about it and create a plan and the time to start is right now.
Because an early start grants you the advantage of compounding your interest and growing your savings faster. You’ll be better prepared for any eventualities, and your savings goals won’t be derailed say if you get hit with an unexpected medical bill or lose your job.
Automate Your Savings
It not always easy to decide to pay yourself first and still carry through with the decision. The reason is that the human mind is hard-wired not to challenge the status quo – to not do things differently from what they’ve been used to.
However, rather than waiting to get into the habit of saving, think of making it run on auto-pilot. And there’s no better way than to automate the savings process. For instance, you can arrange for transfers to be made to your retirement account from your pay before the money even hits your checking account. And if possible, arrange for multiple transfers to be automated – some into your emergency savings account, retirement account or any other account set-aside for a particular savings goal.
Automatic deposits from your payroll is a great way to kickstart your pay- yourself-first campaign. This is because it requires a lot of willpower to make this a regular habit. The practice doesn’t offer immediate gratification like say, dining out at a fancy restaurant.
How Much Should You Save?
This will depend on your savings goals and your budget. If you aren’t already running with a budget, take time to note your fixed monthly expenses and also your other expenses that aren’t set. Expenses like grocery, entertainment and personal shopping which could vary from month to month.
Also, include your minimum debt repayments. Then compare this estimate against your income to see the excess – if any at all. This is a good guide to see how much extra money you can set aside toward meeting your pay-yourself-first goals.
You should also consider the time it will take you to meet each financial goal. If the expected monthly saving doesn’t meet up with your goals, consider cutting away at your expenses.
Take the time to go through your expenditure. What can you do without? You should find expense items to reduce or to remove completely.
- Subscriptions to magazines you never read.
- The gym membership that you only make use of once in 3 or 6 months.
- The expensive cable subscription.
Whatever monies that can be gotten from trimming off these excesses can be channeled to paying yourself first.
When it comes to personal finance, “pay yourself first” is at the root of every financial progress. Adopting this strategy and embracing it will bring you tremendous benefits and place you well ahead of the pack.