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PrintPay Yourself First: How to Do It and How It Works
Saving October 10th, 2008Have you heard the phrase “pay yourself first”? If not, listen up. This one financial trick alone could be the most powerful way to turn your finances around.
Pay yourself first: Huh?
What does it mean to pay yourself first? Think about how you usually manage your money every month. If you’re like most responsible people, you get your paycheck and pay your bills. Even if you don’t stick to a budget, you probably have an idea of how much your bills are and how much you have left over. After your bills are paid, you kind of spend the rest without much thought.
If you’re trying to save money, perhaps you transfer some money to a savings account. But if you’re like most people, you transfer this money to savings or debt only after you have paid all your other bills and, usually, after you’ve spent a bit too.
The problem with this scenario is that you’re putting your future financial security last on your list of monthly priorities. Sure, the rent and your groceries are high on the list, but a new outfit or weekend getaway shouldn’t be. That’s not to say you can’t enjoy those things—but enjoy them only after you pay yourself first.
How to pay yourself first
Now that most banking is electronic, paying yourself first is easier than ever. Rather than needing to remember to transfer money from your checking account to savings every two weeks, you can set up an auto-transfer to do it for you—even if your checking and savings accounts are at different banks.
But, did you know that if you get your paycheck directly deposited, you can actually have that check deposited into multiple accounts? Just ask your payroll manager. It’s easier than you think.
To help earn the best return on your savings and keep it separate from your everyday checking account, I highly recommend setting up an online savings account. Right now, FNBO Direct has one of the best rates in the country. Incidentally, they’re also running a promotion advocating paying yourself first in which contestants submitted videos showing off their best savings tips.
Why paying yourself works
Every paycheck, your employer deducts your taxes, medical insurance premiums, and 401(k) contributions from your gross pay. You never see it. Because you never see it, you rarely miss that money. If you set up a system to pay yourself first—the same will be true of your savings. It will be safely tucked away in a savings bank before you ever knew it was there.
Leave your system on autopilot for a few years and you’ll have a nice emergency fund. The only effort it takes is about ten minutes to set up your account and change your deposit information.
Do you pay yourself first? How much do you save? How much have you saved?
October 10th, 2008 at 11:03 pm
I turned 29 last month, and I have had things automated for a while. I pay myself first by saving a little over 30% of my take home every month, divided between my regular bank savings account (for expenses a few times a year like car insurance), a high yield savings account, and my IRA. I started saving for retirement when I could enroll at my first job, and then rolled it into that IRA when I left. I work for a small company now with no retirement plan so I continue to fund the IRA.
My goals for 2009 are to start doing other kinds of investing, open a Roth IRA, and buy a new Mac and software so I can do more freelance design work to supplement my income.
October 13th, 2008 at 8:38 am
I’m lucky enough to have just paid my car off. I’ve started taking that money surplus and splitting it in half. Every month half is going to an FNBO Direct account, and the other half is going into a non-retirement mutual fund account (earmarked for future cars and/or emergencies). It never bothered me to shell out the money on a car, so before I even got used to having that extra money around, I redirected it.
On top of that, I’ve had a 401(k) through work, and a Roth IRA, for several years. So far, I’ve got nearly a year’s worth of my current salary between my 401(k) and my Roth (I’m 28).