Paying yourself first is one of the keys to building your net worth or turning around your financial life. It is a key to milestone in a person’s financial journey. So what do all of these personal finances bloggers mean when they say paying yourself first?
What it Means to Pay Yourself First
Whenever you get paid your money will no longer all go straight to your checking account for you to spend. Instead a designated amount of money will automatically get transferred to a savings account, investment account or retirement account.
This is the core of paying yourself first. You will no longer save whatever is left over at the end of the month, if anything at all. By paying yourself first you will now proactively save and make your budgeted money last until your next paycheck. There are many reasons and many ways that this can be done.
Why Should You Pay Yourself First?
Paying yourself first has a lot of advantages. It makes spending your saved money harder. Often you’ll have to make an effort to transfer the money out of a savings account or sell investments in your investment account. This effort is often enough to get you to think twice before dipping into savings.
If the money is in a retirement account you’ll face a lot of penalties and taxes. The financial penalty here should be more than enough to stop you unless it is absolutely necessary. These barriers will hopefully allow you to keep more of your money in savings and decrease your unnecessary spending.
Paying yourself first sets you up for financial success. It allows you to prepare for larger purchases down the road. Need new tires for you car in six months? Pay yourself first to make sure the money is there when you need it. It will also help with longer term goals like retirement and a down payment on your first house.
How to Pay Yourself First
So how can you pay yourself first? You can set up an automatic transfer out of your checking account on the day of or the day after your paychecks get deposited to a savings, investment or retirement account. This can normally done through your bank or investment firm. If you want to contribute to a 401(k) to save for retirement you would do that through human resources or payroll at work.
Another option is to have your payroll or human resources department set up an automatic deduction that takes part of your paycheck and puts it in a savings account instead of dumping it all in checking. They may also be able to set up direct investments into investment accounts including taxable accounts and IRAs if you provide them with the correct information.
I pay myself first by using ING Direct’s Automatic Savings Plans to transfer money out of my checking account on my paydaus and send it to various targeted savings accounts. I also have automatic transactions set up for a taxable investment account and Roth IRA at Vanguard. All of these transactions come out the same day as my paycheck goes in which means I won’t be tempted to spend the money.
Do you pay yourself first? If so, what methods do you use to pay yourself first?