The average family today spends most of their time earning money so they can decide who, how, and when to pay all the people they owe, while making sure they have everything they need. Then, the money is gone, and the cycle of earning and worrying starts all over again. The current economic conditions haven’t made it any easier for people to “pay themselves first.” Worse still, many people have little understanding of what it actually means to pay yourself first. Fewer still seem willing to take the time to read the 1926 classic The Richest Man in Babylon or do other things that could help ensure they achieve financial satisfaction.
The Importance of Paying Yourself First
Essentially, paying yourself first means that when you get paid – before you pay anything else, whether it be for groceries, fuel, bills, or a new pair of shoes – you pay yourself by setting aside money in a high-yield savings account. If you don’t want to use a bank account, get an empty wine bottle and start putting a set amount of money into it each payday. It doesn’t have to be a lot, and it certainly shouldn’t be so much that it makes the rest of your days feel like a financial struggle. Even saving anywhere from $10 to $100 per payday, in any manner, is vital to your financial well-being.
The reasons to pay yourself first are endless, but the most important one is that it helps you develop a mindset of saving. You should be able to put something into your personal “piggy bank” every time you earn money. By making yourself a priority, you send a clear, conscious message to both yourself and the Universe. Many people mistakenly pay themselves first by going out to dinner, upgrading their computer software, buying new shoes, or taking a vacation. This, however, is NOT what it means to pay yourself first.
Allocate the money you set aside as something you cannot touch. Yes, you can set a goal for the money, but the key is to keep it out of easy reach. Most people would do well to deposit it into an account that doesn’t allow quick access. If you can withdraw it easily at an ATM, chances are you’ll be tempted to use it whenever something comes up. Instead, consider using an online bank that doesn’t provide a debit card, forcing you to transfer the money before you can access it. This delay can help you resist the impulse to spend it.
Financial experts agree that most people typically save in this order: first, they pay their bills; then, they have some fun, buy necessities, and only save what’s left. This mindset, however, works against your ability to save. If you save first and spend later, you make yourself the priority. Furthermore, getting used to this early in life will help you value money and set a healthy financial routine. If you’re currently doing things in reverse, changing the habit may take time, but it’s possible.
Think of your savings as a buffer. If you have big plans for the future, you can use the money for that. Alternatively, you’ll be building a nest egg, little by little, that will help you in case of an emergency. As your savings grow, you’ll feel more financially secure, and it will provide you with a very tangible picture of the benefits of saving. Sure, it’s not a quick fix for financial success, but in a year’s time, you’d be surprised at how much can add up.
How to Get Started with Paying Yourself First
So, how do you do it? With so many bills to pay and barely enough money to get through until the next payday, how can you start paying yourself first? It really is easier than you think.
The first step is to open a Roth IRA account. Sure, the market is unstable now, but if you’re still relatively young, you have plenty of time for it to rebound. You could also start investing as much as possible into your 401(k) or another retirement account. If you get a raise, even a small one, invest it into one of these accounts. By doing so, you’ll never feel like the money is missing. You don’t need to be an expert in stocks or investments to do this – just focus on making safe investments and then forget about them for a while. If you check them every day, you might lose the “pay yourself first” mindset and become frustrated.
Another strategy is to find high-yield savings accounts that don’t offer ATM access. Choose an online bank like ING or another one with incentives that allow you to earn money just by opening an account. Once you’ve opened it, set up automatic transfers from your regular account. A good starting point might be $50 per month. It’s not enough to break the bank, but it’s a comfortable way to save $200 per month over time.
In today’s economy, financial experts suggest that almost everyone can save at least 1% of their income. While this may not seem like much at first, it’s an easy and painless way to start paying yourself first. Over time, this will give you the confidence to increase the percentage to 2% or 3%. Experts also recommend that once you pay off a debt with a monthly payment, you should take that same amount and begin saving it. After all, you’ve gotten used to not having it each month. Although it might be tempting to have an extra $200 per month to spend, you won’t miss it if you roll it into a savings account instead.
Other Simple Ways to Save
There are plenty of other ways to save and pay yourself first. For example, try refusing to spend any $5 bills you come across. Instead, put them in your wine bottle. You’d be surprised how quickly 50 $5 bills can add up. You can do the same thing with your change. This type of money is easily forgotten, and once it hits your wallet, it’s as good as spent. The point of paying yourself first is just as much about your mindset as it is about the physical action. You need to begin believing that you’re worthy of the payment and that it will be worthwhile in the long run.
