Do you have savings? Have you established an emergency fund that can cover unforeseen expenses? If not, you’re not alone. According to a 2021 survey by The Balance, a sister publication of Investopedia, most Americans don’t even have $250 in savings. This lack of savings also means that they can’t plan for future expenses or enjoy luxuries. But it doesn’t have to be this way. You can set yourself apart from those who struggle financially by following a simple strategy: Pay yourself first.
Paying yourself first is considered the golden rule by financial planners. It’s a simple but effective strategy that requires dedication and discipline. To implement it, you need to prioritize saving a portion of your income before using the rest for expenses or other purchases. By doing so, you ensure that you’re consistently saving and investing in your future. However, it also means that you’ll have to resist the urge for instant gratification and prioritize your financial goals.
KEY TAKEAWAYS
- Paying yourself first is a fundamental concept for financial planners.
- To achieve this, set aside a small amount of your paycheck, such as $50 to $100, for an investment vehicle such as a savings or retirement account.
- Prioritize saving the amount you committed to saving over other expenses, such as grocery shopping.
- If you have existing debts, consider the financial implications of increasing your savings over your debt. It is possible that you will pay more in interest than you save.
What does “Pay Yourself First” mean?
Paying yourself first is one of the most basic concepts of personal finance that experts strongly advise. It’s a basic principle that can help you accumulate substantial wealth over time. Even if your budget is limited, you can begin with as little as $25 or $50 per month. You may prioritize your financial future and ensure your emergency fund by making your personal savings the first bill you pay each month.
Starting with a tiny amount, such as $100 per payday, and setting up automatic salary deductions is the easiest method to pay yourself first. After a few months, you won’t even notice the withdrawal. As your salary increases or your expenses decrease, you can increase the amount you set aside each month.
Paying yourself first is not only a terrific way to prepare for unforeseen needs, but it’s also a great way to save for planned purchases. Paying yourself first can help you achieve your goals, whether you’re saving for a new car or a vacation. You’ll have the money you need when you need it, rather than having to scramble at the last minute.
Paying yourself first is recommended as a logical investing approach by financial consultants and writers alike. This simple yet efficient strategy can assist you in increasing your money and securing your financial future. So, why not begin paying yourself first now and see how quickly your money can accumulate?
Why is “Paying Yourself First” important?
One of the most essential reasons for “Paying Yourself First” is that it allows you to accumulate wealth over time. You may take advantage of compounding interest and earn more money on your assets if you constantly contribute to your savings. Furthermore, “Paying Yourself First” can lessen financial stress and promote total financial freedom.
- A Foundation for Financial Stability: Paying yourself first provides a financial stability foundation. Setting aside a percentage of your earnings for savings creates a safety net that can protect you in times of crisis or unexpected expenses.
- Achieving Long-term Goals: By continuously saving a portion of your salary, you can accumulate wealth and work toward your financial goals, such as purchasing a home or retiring comfortably.
- Avoiding Impulse Spending: it assist you in avoiding impulse purchases. If you emphasize saving over other expenses, you’ll be less likely to spend your money on needless things.
- Encouraging Financial Discipline: Encouraging Financial Discipline is an essential skill to acquire for financial success. You’re creating a habit of smart financial management by routinely saving a portion of your salary.
- Peace of Mind: Knowing you have a safety net in place and are working toward your financial objectives might bring you piece of mind. You may relax knowing that you’ve saved money for emergencies and that you’re making progress toward your long-term goals.
- Building Wealth: You can accumulate wealth over time by constantly paying yourself first. Your savings can be invested in vehicles such as equities, mutual funds, and retirement accounts, which can produce long-term profits and compound interest.
- Reducing Financial Stress: Financial stress can have a negative impact on both your mental and physical health. Paying yourself first can help alleviate financial stress by giving you a sense of control over your resources and creating a safety net in case of an emergency.
How to start paying yourself first
If you’re interested in starting to “Pay Yourself First,” here are some steps you can take to get started:
Determine your income
The first step to “Paying Yourself First” is to determine how much money you’re bringing in each month. This will help you understand how much you can realistically set aside for savings.
Set a budget
Once you’ve determined your income, you should create a budget that takes into account all of your spending. Rent or mortgage, utilities, groceries, transportation, and any other costs are all included.
Determine your savings goals
After you’ve deducted all of your expenses, it’s time to set some savings objectives. This could involve saving for a down payment on a house, putting money aside for an emergency, or investing in a retirement account.
Automate your savings
One of the most simple ways to “Pay Yourself First” is to automate your savings. This entails setting up monthly automatic transfers from your checking account to your savings account. This allows you to contribute to your savings objectives on a continual basis without having to worry about it.
Common misconceptions about “Paying Yourself First”
- “I don’t make enough money to save”
- “I’ll start saving later when I have more money”
- “I’ll pay off my debt first, then start saving”
“I don’t make enough money to save”
One common misunderstanding regarding “Paying Yourself First” is that you need a lot of money to save. The truth is that anyone, regardless of income level, can begin saving. It may necessitate modifying your budget or finding ways to boost your income, but you can begin saving regardless of your income.
“I’ll start saving later when I have more money”
Another common myth is that you should wait until you have more money before beginning to save. The truth is that the earlier you begin saving, the better. Even if you can just save a modest amount each month, it will add up over time and help you attain your financial goals.
“I’ll pay off my debt first, then start saving”
While it’s important to pay off debt, it’s also important to start saving as soon as possible. By doing both at the same time, you can work towards achieving financial stability and security.
Benefits of “Paying Yourself First”
Building wealth over time
You may take advantage of compounding interest and earn more money on your assets if you constantly contribute to your savings. This can help you achieve your financial objectives faster and save for a happy retirement.
Peace of mind and reduced stress
When you have emergency and unexpected spending funds, you are less likely to feel overwhelmed or stressed about your finances.
Ability to reach financial goals
Prioritizing your savings can be instrumental in reducing financial stress and promoting peace of mind. By having sufficient emergency and unexpected spending funds, you can significantly decrease the likelihood of feeling overwhelmed or anxious about your financial situation.
Increased financial independence
Establishing a savings fund can reduce your dependence on credit cards or loans when unexpected expenses arise, leading to increased financial independence and avoidance of excessive debt
Risks of not “Paying Yourself First”
Living paycheck to paycheck
Not prioritizing your savings puts you at risk of living paycheck to paycheck and being unprepared for unexpected expenses. In such cases, you might have to rely on credit cards or loans to cover your expenses, leading to financial instability and high levels of debt.
High levels of debt
Relying on credit cards or loans to cover expenses can lead to accumulating high levels of debt, which may be challenging to pay off and can harm your credit score and financial stability.
Inability to retire comfortably
Without having savings set aside for retirement, it may become challenging to retire comfortably or retire on time. This can be particularly difficult if you’re solely relying on Social Security benefits, which might not cover all your expenses.
Lack of financial security
When you don’t have savings set aside, you’re at risk of experiencing financial insecurity. Unexpected expenses or emergencies can derail your financial stability and leave you feeling stressed and anxious.
FAQs
Why is it so important to pay yourself first from your paycheck?
The benefit of “paying yourself first” with your income is that you construct a nest egg to protect your future and a cushion for financial crises such as your car breaking down or unforeseen medical expenditures. Many people report feeling a lot of worry when they don’t have any money.
What are two reasons you should pay yourself first?
Here are seven reasons why you should prioritize yourself.
1. It establishes appropriate priorities. What is more important than investing in your future?
2. It’s Simple.
3. It Harnesses the Power of Dollar Cost Averaging.
4. What’s Left Is What’s Left.
5. It Fosters Discipline.
6. It Establishes a Healthy Work/Reward Cycle.
7. It Demonstrates Smart Financial Strategy.
What is a major benefit of the pay yourself first strategy?
Paying yourself first promotes good financial habits. You can set money aside by automatically taking a percentage of your salary before you rationalize how to spend it.
Who says pay yourself first?
“Pay yourself first” was a term first used in the book The Richest Man in Babylon. However, Robert Kiyosaki has turned this simple phrase into a deep personal finance guideline.
The Bottom Line
“Paying Yourself First” is a personal finance method in which you prioritize your savings goals over other expenses. You may create wealth over time, alleviate financial stress, and attain your financial objectives faster if you consistently contribute to your savings. While it may necessitate some budget or salary modifications, “Paying Yourself First” is a sound financial plan that can help you attain financial stability and security.