In money management, have you heard the phrase “pay yourself first?”
The idea behind this is to think of yourself just like one of the lenders and creditors you pay every month. You pay your mortgage loan or rent every month, right? How about food? You have to pay for your groceries or whenever you eat out. You also pay monthly for your utilities at home, right? It’s not an easy task to keep the lights and water on at your home every single day.
Wherever you make a payment to any of them, you never see that money again. When you use your credit card, you pay your lender every month and that’s it. Once you send money to your lender, you never get that money back again. Now, think of yourself as one of those lenders you diligently pay every month.
But the goal is to pay yourself first. You come before all the other payments you have to make every month. This way, you are forced to save money every month. It can be for your retirement account, saving up to buy a house, or even starting a family. There are just some of the goals you could be preparing for financially and paying you first can help.
The idea is simple – put in a specific amount you can save every month and forget about it. Much like how you would not get the money back from your lenders, do not dip into these savings just yet. This is important as CNBC shares that about half of Americans would dip into savings for an emergency. Wait until you have reached your target amount. If you are now sold on the idea of paying yourself like a creditor, here are a few tips to get started with it.
Start with 1% of your income
When you pay yourself first, you do not have to take the lion’s share of your income. That would be nice if it is doable. But remember that you have other payments to make as well. You cannot sacrifice all those just to get to your goal faster. You could be saving a lot for your emergency fund but neglect your food budger living off noodles for weeks at a time.
Doing this could put your health at risk and the money you saved could simply go to your hospitalization or doctor’s fees. One thing you can do is simply start with 1% of your take-home pay. There is a good chance that this will be a very small amount and that is a good start. What you are doing is creating that habit of paying yourself.
Once you create that habit, you can then begin increasing that percentage you save. This can be a gradual increase over time until you reach a percentage that can help you reach your goals a lot faster. The important thing is to focus on forming that habit. Once you do, you will be doing it over and over again even without noticing it.
Pay yourself first by keeping the change
When you get home at the end of the day, you could have a few changes in your pocket or in your bag. You can save that up every day by putting them in a jar at home. And that is just what you bring home. What about rounding off your funds in your bank account every after making payments online? It is similar to putting loose change in a jar, it’s just the online version.
Much like the first tip, loose change might not automatically make you a millionaire. It could barely make a dent in your savings account. But again, the goal behind this is making a conscious effort to form a habit of saving money. If you consistently pay yourself with the small change around the house and even with your online accounts, it will become a lot easier to do the same with higher amounts. If you do not know how to save small amounts now, it will be more challenging to set aside huge amounts later in life.
Mind your ATM fees
How often do you find yourself using another bank’s ATM machine just because it’s the one closest to you? It beats having to drive all the way over to the next location miles away when there is an ATM near you. Of course, you have to pay a small fee for using another bank’s machine but you’re convinced it’s just a small fee.
What if you withdraw money twice or even thrice a week? Then you incur a higher fee for using the ATM multiple times. Value Penguin even shares that there are instances where your bank and the company that operates the ATM you are using will both charge you fees. One way to help you address this is to limit the number of times you use another bank’s ATM. Once you do that, you get to see just how much you can save by limiting the number of times you use the ATM of another bank.
You can take this further by actually making the trip once a week over to your local ATM. It could be on your way to the mall, while you are going to the office, or when you are about to go grocery shopping. In these types of situations, you can still pay yourself first by transferring whatever fee you should have been paying over to your savings account. You get to save money which otherwise would have just gone to another lender.
Pay off loans but continue making payments
As you pay off your loans, you can use this opportunity to pay yourself first as well. What you can do is that for every paid off loan, you can continue making that payment but automate it to go to a savings account. It can be your retirement fund, your emergency fund, or even your kid’s college fund. The idea is that you were able to sustain that payment in your budget, just continue living off the same budget all while increasing your savings.
You can also divide that amount to cover not only savings but other loan payments as well. Consider putting 50% of that amount over to your savings and divide the rest to make additional debt payments. You can put a bigger percentage to high-interest payments so you can save on interest fees in the long run.
It is also possible to focus on accounts with the lowest balance. This is because once you pay them off, you can include that amount towards your savings or t pay off other debt accounts. It can set off a chain that allows you to pay down your debt obligations faster all while saving money in the process. This gets you closer to your financial goals also.
Forget about windfall money
You can also pay yourself first if you can forget about windfall money as soon as you get it. Now, this is a lot more challenging since this is money you did not expect to get. This is an amount not tied to any payment you need to make. As a result, you start thinking of using the amount to finally buy the things you have been wanting to purchase.
Windfall money can come from several sources. One could be winning the lottery for any amount. You might also get an inheritance from a relative who recently passed away. The most common source of windfall money could be from your tax refund checks. You do not know how much you will get every year or if you will be getting one at all.
The way you forget about windfall money is that as soon as you receive it, transfer it immediately to your savings accounts. By now, you should have several accounts specific to your future plans. It can be maxing out a 401k to take advantage of an employee match. You could also be putting that amount into a 529 plan for your children’s college fund.
The concept of being able to pay yourself first boils down to prioritizing your future needs and saving up for them. You pay yourself much like how you pay other lenders so you can force yourself to save money.