Want to save money each month and work toward your financial goals? Paying yourself first might just make your path to your ideal life simpler, faster, and more attainable.
Paying yourself first is a core personal finance rule that many recommend. But let’s be honest, it can be tough to stick to. Without a budget, payday can come and go, with all your money going straight to bills, leaving nothing for you to save.
There are countless ways you could use your money, and understanding this can be the key to reaching your financial goals. You might already be trying to save each month, but did you know you could save even more by paying yourself first? Interesting concept, right?
Most people handle their money like this: they get their income, spend as little as possible, and save whatever is left. This is known as Parkinson’s Law, which suggests that if you have extra resources (money, time, etc.), you’ll find a way to use them up.
Many people say they don’t have enough money to save, build an emergency fund, or invest because they don’t have any leftover cash. If saving is tough for you, paying yourself first could be the game changer you need.
Paying yourself first means setting aside money for yourself as soon as you get your paycheck. This could be putting a set amount into savings or paying down debt. The key is to do it first, treating your savings or debt like the first bill you pay each month. This turns saving from a desire into an action.
Once you make this a habit, you can grow your wealth over time. Paying yourself first helps you save more and spend less. If you commit to this each month, you’ll naturally spend what’s left.
It might be challenging at first, like any new habit, but it gets easier with practice. This method helps you focus on what’s important, cutting out unnecessary expenses.
Paying yourself first is crucial for future planning, especially if you want to retire someday. If you wait until the end of the month to save whatever’s left, you’re not prioritizing your future.
Using this approach, I can save over 50% of my income each month!
In short, paying yourself first helps you:
– Save more money
– Cut back on spending
– Prepare for the future
Tracking every dollar and sticking to a budget can be time-consuming. If you struggle with budgeting, paying yourself first is a great solution. Automate your savings so you don’t even notice the money is gone.
To do this, set up an automatic transfer from your paycheck to your savings account. You won’t miss the money because it’s gone before you see it. This money is reserved for your financial future and goals, like retirement or a new car.
Start by writing down your monthly income after taxes. For example, if you earn $2,000 after taxes, list your savings goals in categories like:
– Financial Independence
– Long-Term Savings for Spending (LTSS)
– Education
I typically reserve 15% of my income for each category, meaning $300 goes into each one right after I get paid. Adjust these percentages to fit your needs.
For your Financial Independence Account, you can invest in retirement accounts, stocks, bonds, or ETFs. Peer-to-Peer loans are another option, offering higher returns but with increased risk.
For LTSS, create sub-accounts for specific goals like an annual holiday, an emergency fund, or a house down payment. For example, save $100 per month for each goal, totaling $300.
Use this money to pay off any minimum debt payments. As you pay off debt, you’ll free up more money for other financial goals.
For education, invest in courses or books that help you learn more about money and investing. This can boost your salary and financial knowledge.
The key is to make paying yourself first a habit. This gives you control over your finances and a sense of freedom.
How do you start? Here are some tips:
1. Enroll in your employer’s retirement plan. Contributions are deducted before taxes, and some employers offer matching contributions, which is free money.
2. Start small. If you can’t save a lot right now, start with $50 per month and adjust as needed. Small steps are better than none.
3. Increase your earnings. Look for ways to earn extra money and funnel it straight to your savings or investment accounts.
4. Reduce spending. Track your expenses and cut out unnecessary ones. Try challenges like a no-spend month to boost savings.
There are many money-saving tips out there. Focus on what you value and cut out the rest. Set clear financial goals and take steps to achieve them.
Remember, this is my personal approach. It works for me, but you should find what works for you. Don’t get overwhelmed—trust the process and you can overcome any obstacles.
Are you ready to pay yourself first? Give it a try and see how it transforms your financial life.