You have to pay yourself first.
This is my go-to personal finance tip. This is advice that’s been preached by some of the most reputable personal finance bloggers and money management experts. This is the advice that I used to save $25k by 25 (and much more in investments).
What’s pay yourself first all about? Why should I care about paying myself first?
Excellent questions. Let’s proceed with the tactical stuff.
How can you try it?
You go to your employer or bank and ask them to deduct X amount off your paychecks. You then ask that this money is put away and that you can’t access it.
The only way that the pay yourself first tactic can work is if you have separate bank accounts. Keeping all of your money in one checking account will not work,.
The money needs to be as far away as possible from you. As soon as you receive your paycheck the goal is to set aside a specific amount for bills and to “pay yourself” a portion (I hate percentages and rules of thumbs) into either a separate savings account or any other investment vehicle that you use.
You should have an online savings accounts that’s connected to your checking account. You should also put away an amount that you’re comfortable with so that you don’t have your entire check gone.
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These online accounts create an automatic barrier: transfer time. Most online accounts will also allow you to order online cheap checks for when you need access to them.
How much do you save?
This depends 100% on your income vs expenses.
First thing you need to take care of is to ensure you’ll have enough cash on hand to pay your bills. If you have more expenses than income, you may have a slight problem.
Then after you’re bills/expenses (i.e. cell phone, gym) are accounted for, you need to consciously plan how much money you want to save and how much you want to spend on yourself for the pay period.
There will be times where you want to save everything because you don’t have anything coming up. There will also be times where you have many purchases coming up and you can only pay yourself first a small amount.
I suggest starting off with $50 every two weeks and moving up rapidly from there.
The key ingredients of the pay yourself first tactic are flexibility and conscious planning.
You need to be flexible because your income vs expenses will always be shifting. There’s no set amount that you can spend in a 1-2 week period because that’s just now how life works. You need to plan consciously because if you pay yourself first your whole paycheck, you’ll only lie to yourself and deprive yourself out of all of the fun in your life.
Let’s take a step back. What are the benefits of this system?
Too often savings are neglected until it’s too late.
It’s easy to say that you’ll go out/make a few purchases and then save the rest of your income as your paycheck day fades into the dust. The reality is that the extra cash in your checking account ends up getting spent long before you have the opportunity to save it or transfer it into another account of yours.
Screw paycheck to paycheck life.
Living paycheck to paycheck creates way too much stress.
If you save even $50 when your paycheck comes in, you’ll be on the right track and be slowly but surely getting ahead of your friends. The reason that many folks live paycheck to paycheck is because savings come last. Bills are paid, main expenses are covered, and then the entertainment comes in. The problem is that by the time the thought of saving money comes into play, it’s usually too late and the wait for the next paycheck begins. Don’t let this happen to you. Pay yourself first (even if it’s a minuscule amount, who cares).
This really does work. This money saving strategy isn’t iffy or subjective at all. You save your set amount of cash first and then you spend money on whatever else you want to.
Give the pay yourself first tip a try.
What do you have to lose? If you do try it or have tried it, then please share some thoughts with us below…