Hey there!
I hope your day is going well and you are feeling good!
Today I am back with another money related post because…why not?! And the topic is how to pay yourself first.
Disclaimer: I am not a financial planner, professional, guru or anything of the sort. I am just a person obsessed with personal finance and sharing what I have learned over the years and what works for me!
Before we get started on the how, let’s discuss what that even means. It means exactly how it sounds: before you pay your bills, household needs and recreational spending, you should set aside money for yourself first. And by that I mean set aside to SAVE, whether that is your savings account, 401K, ROTH/traditional IRA, etc. As long as you are setting aside a percentage or dollar amount to pay your most important commitment first (hint: you).
Sounds simple doesn’t it? Well it can be, but many times it can be more difficult than you think. Especially when you have a long standing habit of doing the opposite.
Why do it?
Let’s bring it back to the notion of paying the most important person first. Too often do people pay for their bills religiously and fun expenses and then scramble to set up a livable retirement account. Same thing goes for a sizable emergency fund and investing. One common reason is that we don’t have enough money to save for all of the things yet we find money to allocate to other necessities (and non-necessities).
So when we pay ourselves first, we prioritize our current and future selves and use the remaining money to fulfill the other obligations. So that way SAVING becomes our most important “bill” that gets paid every month/bi-weekly/weekly instead of something that happens when it’s convenient or sporadic. Making this necessary change exponentially increases the chances of reaching your financial savings goals and sets your future self up for success. Our obligation to our financial security is more important than our financial obligations to someone/something else. I’m not saying don’t pay your landlord or light bill, but don’t prioritize everything else but yourself.
First thing’s first… Budget!
So to be successful in optimizing your savings and investing potential, it is imperative that you get your budget in order. You must know how much you are paying for your bills, utilities, household necessities, groceries, fun and other expenses. Once you add up how much you give to each category monthly, it’s time to cut where you can and set a budget for each. Now you can see how much money you can save. You can get a feel of how aggressive you can be and how many pots you can pay yourself in at a time (which we will get to later).
I get into how to set the initial budget in this post: “Ways to save $hundreds right away during the COVID-19 pandemic” in step 1.
Some people argue that they cannot do this because then they will not have enough left over to pay all of their bills. I say you will find a way. If you are left with bills that need to be paid people find a way. Whether that be picking up a second job, cutting an expense that isn’t necessary at the moment (subscription memberships, full package cable, etc) and being more aggressive at finding a higher paying job. You will find a way and it’s no excuse to take from your future self. Here’s a thought: most people will not be motivated enough to get a second job or cut their HBO and SHOWTIME package to fund their savings, but many will be if they HAVE TO to pay bills. You need as much urgency when it comes to prioritizing for your future as you do when it comes to paying these companies.
How to do it? Automate
Automation is the key to success. Automation is the key to success. Yes, I had to say it twice. We are human and we get swayed by temptation. One tip that I find helpful is to have your savings automatically come out, by bank transfer or split your direct deposit. This eliminates the need to rely on yourself to make that transfer every pay period.
What I do is have my job’s direct deposit split into 3 accounts. The bulk goes to my catch all account, 1/2 of my monthly bills amount goes to my bills account, and the smallest amount goes to my fun account. And once the bulk hits my catch all account, I have a recurring transfer that takes out a set amount the morning after pay day. That way I don’t have to rely on myself to make that transfer, it gets paid once I have gotten paid, and I don’t see the money in my account so it’s like I never had it. It mentally helps me not be tempted to hold onto it. And then at the end of the 2 weeks, I take what is left and allocate them into other savings accounts. So that way I pay myself FIRST and I pay myself extra with whatever is left over every 2 weeks. That is what personally works for me! Do what works better for you.
How much to save/ pay self?
This number or percentage is up to your goals and needs! Do you have an emergency savings fun that can carry you through at least 6months in case of emergency? If not, I would focus on this and put in as much as your budget allows. That number is different for everyone.
How many goals do you have? Are you saving for a large future expense like a house or new car paid in cash? Are you saving for your dream vacation for you and your family? Are you saving to start that new business? Do you have more short term or long term goals? Write it all out, know what the end goal amount is and set a plan to allocate a certain amount and calculate how long it would take to reach the goals.
Many financial experts recommend the 50/30/20 rule. This method suggests that you put 50% of your monthly income towards necessities like mortgage/rent, food, and other important bills. 30% goes to your wants like hair/nail appointments, dinners out with friends, etc. And 20% goes towards savings and debt repayment. If you are looking for a starting point on how much to allocate where, try this!
I know some people have a tight budget with not a lot of wiggle room or extra money to save. I have been there and it is very common. Any amount helps! 20% can be a lot. It’s okay to start small and grow when you can. Even if it is $50 per pay check to start, that is $1200 at the end of the year (if you are paid bi-weekly) that you wouldn’t otherwise have! IF that is too much, start with $20. You can always increase it later. As you work on earning more, you will still be setting up the necessary HABITS to save money and have a small savings set in case of emergency.
Once the emergency savings is funded and you are paying into your retirement, I would then save for other things like that vacation or large item you are saving for. Make sure you prioritize the money you will NEED, then save for the WANTS.
I dive into types of accounts, including savings accounts in this post here: “How many bank accounts should you have?”
What about debt?
If you have debt, which most people do, I consider paying this down as part of paying yourself. Hear me out. Yes, technically it is a bill. But the longer you hold on to consumer debt and paying the minimum, the more you will be paying in interest over time. So once you knock those out, you will be able to save more. When you have debt, many like to lump that in with your savings and pay those off together. As you pay down your debt, you are saving from future interest costs.
So I say prioritize this, as most high interest debt is taking more money than these low interest savings accounts are making you. If the debt paydown is eating up almost all of the money you would otherwise set aside for savings, make sure to at least still save a small portion of it. Even if it’s $20 or so per paycheck. You will build the necessary habits that you will need once the debt is gone! And you still end up with some savings to grow larger later. Just make sure to still do this first. Pay down your debt before you pay that electricity bill (but make sure to pay both).
Make adjustments when necessary
Remember… no one way is perfect. Try out what amount and methods work for you and adjust when needed! Start where you are comfortable and increase when you can. You don’t want to risk an over draft fee or temptation to use credit because you were too aggressive in your savings to start. Built it up!
Thank you for reading and I hope you get something useful out of this article! Let me know which parts spoke to you the most in the comments below!
I will speak to you in my next post!
With love,
CoCo
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