Monday, March 1, 2010

Pay Yourself First and Get Your Life in Order

You might have noticed that money comes directly out of your paycheck before you even receive it, at least in the United States. The government understands the concept of “Pay Yourself First” (or paying itself first), by taking out taxes before you get your hands on your income. However, this concept can also be used to your benefit, by applying it to saving money.

Most people go to work each day for 2 main reasons. One, they work to receive money to pay their bills. Two, they work to have money so they can spend it to enjoy themselves. (Notice that you didn’t come in first place.)

Why is everyone else more deserving of your money than you?

Yeah, they’re your creditors and you have an obligation to pay them. But what about the obligation you have to yourself? The concept behind paying yourself first is simple: save money before giving it away. If you don’t pay yourself first, there will always be something that money could be spent on instead of saving it. There never seems to be a perfect time to start saving money, so you just have to jump in and do it.

Some reasons to start saving now instead of waiting until next year (or the year after):

  • When you pay yourself first, you’re mentally establishing saving as a priority. You’re telling yourself that you are more important than the electric company or the landlord. Building savings is a powerful motivator — it’s empowering.
  • Paying yourself first encourages sound financial habits. Most people spend their money in the following order: bills, fun, saving. Unsurprisingly, there’s usually little left over to put in the bank. But if you bump saving to the front — saving, bills, fun — you’re able to set the money aside before you rationalize reasons to spend it.
  • By paying yourself first, you’re building a cash buffer with real-world applications. Regular steady contributions are an excellent way to build a nest egg. You can use the money to deal with emergencies. You can use it to purchase a house. You can use it to save for retirement. Paying yourself first gives you freedom — it opens a world of opportunity.
I’ve never met anyone who does not wish they had started saving earlier. Nobody tells themselves, “Saving was a mistake.” No matter what your age, begin saving now. And if you already save, consider boosting how much you set aside each month.

View YOU as a monthly expense

Viewing your savings account as a monthly expense – one that takes precedence – is a quick and simple way to build a financial cushion, and you don’t need to pay yourself a lot. Start small and deposit 5% or 10% of your weekly or monthly income. Once you’ve gotten used to the idea, increase your deposits. Naturally, it’s easier to spend than save; therefore, you may have to fool yourself into saving money.

Automate deductions

Talk to your employer about automated deductions and have money from your paycheck automatically transferred into a savings account. Also, several banks feature programs where a specified amount is automatically drafted from your checking account and deposited into a savings account.

After you get used to the pay yourself first concept, you really won’t miss the money. It is a good idea to put that amount into a separate account, so you will not be tempted to spend it.

Here are three accounts that you should have:

  • Emergency Fund -- Enough money to cover the unexpected expenses
    • The washer breaks
    • Need a new tire for the car
    • A job loss
  • Short-term Fund -- Enough money to cover the things you want in the next few years
    • Maybe a vacation
    • New car
    • New appliances
  • Long-term Fund -- The saving that will be for the major events in your life
    • Retirement
    • College funds
    • Weddings
Planning for the future is very important, and the earlier you start saving, the better. If you pay yourself first, you know you will have a certain amount in a number of years. Even if you already have a pension or other retirement fund, it’s still a good idea to pay yourself first to accumulate more money for the future.

Remember, it is always the noble thing -- to be selfless and to always think of others before yourself. But a line must be drawn, because if you are taking care of others your entire life, who is actually taking care of you?

Do you pay yourself first?

I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any questions or comments, please feel free to contact me.
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