What Does Pay Yourself First Actually Mean?
Pay yourself First is a concept that we’ve all heard before but have you ever stopped to think about it? I remember my parents teaching me this simple concept as a preteen. When you get birthday money, you deposit some of it in savings before spending the rest. This way you don’t blow all of your money in once place. Fast forward a decade or more and my paycheck is deposited in my checking account. Uncle Sam was paid first, then my healthcare coverage, and finally I get what’s left over. I then pay my monthly bills and debt payments if I had any. Finally at the end of the month I transfer what’s left to savings. I did this for quite some time before realizing that I was not following this simple logic. Paying yourself first ensures that you hit your savings goals before you buy a latte or go to a movie.
What Are Your Savings Goals?
Now if you are still in debt it’s possible that you don’t really have any savings goals. I’m not going to debate whether you should save and payoff debt at the same time in this article. For those of us without debt, here’s a question for you: what are your savings goals? Are you saving up for a new to you car? A new laptop? What about bigger goals such as vacations? Or perhaps your biggest goal? Retirement and/or financial independence. I will tell you right now that if you don’t have a goal, you will never achieve it. First you need to set the goal and then figure out what it takes to achieve it. Perhaps it’s to increase your net worth by 5%. What would that require?
Automate That Goal
Once you have your goals locked down, automate them. If your investment account drafts the amount you need to save each month, you will hit the goal. It’s really as simple as that. Say you want to save up for a replacement car and you need $250 per month in order to afford one in a few years. The simplest way to achieve that is to have it deducted from your account just like a car payment. Then if you spend every dime of your paycheck, you car fund is still getting it’s share.
While I find that many things when it comes to money are related to the heart, some of it is still in your mind. For some reason if you can afford something then you tend to buy it. So if I had an extra $250 in checking, I might treat the Mrs to a nice night out spending in excess of $100. She certainly deserves one after putting up with me. If instead that $250 was in the car fund, I would be far more likely to cook her a nice dinner at home. Either way our bellies are full but in the pay yourself first example, so is our savings goal.