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Everyone has heard the term “Pay Yourself First” when it comes to saving money, but many have a hard time understanding how this concept actually works. The thing is, virtually everyone is already practicing this strategy but it’s being done in an indirect way. As such, they never realized they were experts at “Paying Yourself First.”
Look at it this way: let’s say every two weeks you get paid $100. But you know you don’t get $100, the government and perhaps a few other entities stick their fingers in there and your employer gives you a check for $80. You EARNED $100 but you get to KEEP $80. What you did here was pay the government first!
Why not use the same strategy on yourself? You may elect to pay yourself $5 every two weeks when you get that paycheck and the $5 can go directly into a savings or another type of account. Now your employer will give you a check for $75.
The catch here is you have to learn to live on $75 every two weeks instead of $80. Saving money is a discipline and living within your means is a reality most of us do on a daily basis. People who go into debt, run up their credit cards, etc., usually find themselves in a never-ending cycle of having to continue going into debt because all their money is tied up paying back the existing debt. If you can avoid excessive debt, then it’s much easier to save a little bit of money every time you get your paycheck. If you’re a person who is struggling with debt, then it would be advantageous to do research on how to get out of debt.
If you’re a person who is on the edge where saving that $5 every two weeks is extremely difficult to do, then you may want to look at saving vehicles that are tax exempt such as a traditional IRA or 401k. These investment vehicles are tax deferred which means the money goes into an account BEFORE you pay any taxes. So if you put $5 into a tax-exempt account, your paycheck may be $77 instead of $75. You’re saving $5 but your paycheck went down by $3. This can soften the blow when reducing the paycheck you need to live on while trying to save money on top of that.
So that’s how “Paying Yourself First” works. It’s just like the taxes that come out of your paycheck except instead of the money disappearing forever, it’s still your money and you get to keep it. Now that you’re paying yourself first, you need to decide what your savings goals are. Perhaps you just want to save up for a nice vacation. Maybe you will want to put the money away long term and put it towards retirement. You can also do both. The $5 could be split, $2 going towards retirement and $3 for a shorter-term goal.
It’s up to you to determine what your goals are and what you will want to do with the money you save. Finding the best vehicle to invest in may require some homework. If your employer has a 401k program, you can talk to your human resources department and they can refer you to a representative who manages the program. Most banks have experts who are available to assist with your questions. Friends or family may be able to refer you to a money manager.
You will find many options on where to invest your money once you begin to save, and it all starts by “Paying Yourself First.” The numbers used above were of course for simplicity, the actual amount you save will be dependent on your goals and your spending habits. Regardless, saving money is easy to do if you put the money away into an account FIRST before putting it into your pocket. Even for penny pinching misers, money in the pocket is hard to hang onto but if you divert a portion of your paycheck into savings before you have it in your hands, you will find it much easier to save money for whatever your saving goal may be.
