Do you pay yourself first?
There is a saying: “if you fail to plan, you are planning to fail.” When it comes to preparing for your financial future, that old maxim is spot on. One in five Americans has nothing saved for retirement. When the future finally arrives, and it’s time to think about retiring, more and more Americans can’t.
It doesn’t have to be that way, though. You can take charge of your finances, build wealth, and prepare yourself for a brighter future. Additionally, you don’t have to be a financial expert to take care of yourself and your family financially, either. One of the best techniques to get out of a haphazard earn-and-spend cycle is to start paying yourself first. Let’s take a closer look at what paying yourself first is all about.
What does it mean to “Pay Yourself First?”
Pay yourself first, sometimes called reverse budgeting, is a financial management technique designed to help an individual build wealth. With pay yourself first, you prioritize savings and investment goals in a monthly budget over your monthly expenses and debt payments; that is, you allocate money toward your savings goals first, pay your other monthly expenses next, and then use the remainder as discretionary funds for dining out, entertainment, and other miscellaneous expenses. Many people who use the pay yourself first methodology have their monthly savings and investment payments automatically deducted from their bank accounts.
Investments, retirement accounts, and emergency funds are common savings categories for someone who decides to use a pay yourself first program. For a person earning $4,500 on salary each month, a pay yourself first approach to finances might look like this: On the first of the month, $300 would be automatically deducted to a retirement account; $200 would be transferred to an investment account; and $100 would be transferred to an emergency savings account. The remaining $3,900 salary would cover other expenses, such as mortgage or rent, utilities, debt payments, insurance, groceries, and other necessities.
A Game-changing Approach
For most people, the pay yourself first strategy often seems radical. After all, when it comes to budgeting, most people focus on survival; they normally prioritize paying bills that are necessary to maintain their lifestyle and financial security, such as their mortgage and car payments. After that, they worry about paying their utilities and short-term debts. Once those are paid, if there’s anything left, they might save or invest.
When you pay yourself first, saving money moves from last to first place in your financial priorities. Before you pay a single bill, you automatically allocate funds towards your savings and investment goals. For many people, changing their mindset from prioritizing paying bills to saving for the future can be extremely challenging, but with proper budgeting is completely possible. Once you prioritize savings, and see the results of building wealth over time, it’s hard to argue against the merits of paying yourself first.
Benefits of the Pay Yourself First Strategy
The capacity to build wealth gradually is a great reason to use the pay yourself first financial management method. However, there are many other reasons to use this strategy when you’re budgeting your money. For starters, most of us are too busy to keep a constant eye on our finances, and not wealthy enough to hire a financial manager to watch over our money. So, pay yourself first works great. You can arrange for your bank or bill-paying service to allot money toward your savings goals automatically each month, so they’re taken care of. Once these payments are programmed, there’s no need to remember to transfer funds to your retirement account, invest more cash into your favorite blue chip stock, or save for emergencies; it will all happen automatically.
Let’s be honest: most of us lack the good financial habits to save money each month consistently. We often plan to save money, but end up spending more than we expected to by mid-month and need to ensure we have enough money left to make it until the next paycheck. More often than not, our savings takes the hit. However, if you pay yourself first, your savings funds are deducted automatically each month. Therefore, even if you don’t have the best financial discipline in the world, you’ll still be saving for the future.
Are you ready to build wealth and prepare for a better future? If so, consider the pay yourself first strategy. Doing so can help you accumulate wealth over time, even when you’re too busy to pay attention to your finances. If you’re extremely busy, or otherwise have trouble focusing on your finances as much as you’d like, pay yourself first can help you achieve your financial goals with a minimal amount of effort. So, if you want to have a great second act, talk to a trusted financial advisor and see if the pay yourself first plan is a good choice for you.