Pay yourself first
You always plan to stash aside part of your income for the future, but somehow the month runs by with nothing saved up. If this sounds familiar, then the likely reason for your inability to save is because you have spent money on everything else. You have paid for rent, utilities, repairs, and groceries – so you are left with very little or no cash.
The cycle will continue each month unless you take a drastic step like adopting a pay yourself first strategy.
What Does ‘Pay Yourself First’ Mean?
The phrase pay yourself first is a budgeting term to help you save. It means paying for your key savings and investment goals “first,” before any other thing. For instance, you have to do the following before deciding on other items.
• Pay your retirement contributions
• Build up your emergency fund
• Save for your long-term investment goals
• Pay for insurance, including medical and life insurance
• Make a down payment for your home purchase
• Pay off your loans and indebtedness
Why Pay Yourself First?
Money can stir emotions, and human nature makes it very difficult to resist the urge to spend. Covering your essentials first eliminates the temptation of spending on unnecessary things. You will end up saving more for your retirement, investment, and emergencies.
This strategy will also make you more financially smart. You will learn to manage the little amount that’s left after those payments.
Here’s How It Works
The pay yourself first principle requires that you create saving goals and a budget. The budget will allow you to determine how much you can afford to set aside every month.
For instance, if your monthly income is $2,500. And you decide to save up $200 towards your retirement account, $200 for investment, $100 to emergency fund, and $350 towards your insurance and debts.
Then upon receiving your paycheck, you will first pay up the $850 for these expenses, then use the remaining $1650 for other expenses like rent groceries and bills.
How To Pay Yourself First
Here are two strategies you can adopt to pay yourself first
Automatic transfers: Most banks and online banking platforms allow you to set up automatic transfers between accounts. So whenever your paycheck arrives, a certain percentage will be sent immediately to your savings account. You can also set up automatic bill payments to ensure your bills are paid on time.
Split Deposit: Another perfect way to pay yourself first is to speak to your HR in your workplace to split your paycheck into two, and pay a part of it to your savings account. The part paid to savings will be the amount you have realized you can save up for both investment and emergency funds.
Paying Yourself First for Self-Employed
If you are self-employed, it may be challenging to implement the automatic transfer method, as your income is inconsistent. As a freelancer, business owner, or service provider, there are some months when you earn high and others when earnings drop.
The way out is to set a minimum savings amount based on your projections from your budget. If you have a slow month and are unable to meet up the savings amount, then you can cover up for it in months when earnings are high.
Paying yourself first is a significant pillar to attaining your financial goals and a golden rule to grow wealth.