It’s possible to pay yourself first with the following steps:
- Establish how much money to save—as a set dollar amount or a percentage of every paycheck—and what to save for.
- Consider setting up an automatic transfer for some of each paycheck to go directly into a savings account, retirement account, investment or other savings vehicle.
- Create a budget based on what funds will be available after paying yourself first. Monthly expenses and spending can be managed while still tucking money away.
Here are some common savings goals you might consider if you’re paying yourself first:
Retirement
While three-fourths of Americans have retirement savings, only 40% think their savings are on track, according to the Federal Reserve. Paying yourself first through a retirement account can help build that post-career income.
You might consider whether you’re eligible for work retirement plans, such as a 401(k) or a 457(b). If you’re not, a traditional IRA or a Roth IRA might be options. And those looking to retire early could consider additional ways to save.
Emergency fund
An emergency fund is meant to cover unexpected expenses like car repairs, medical bills or loss of income. The Consumer Financial Protection Bureau (CFPB) suggests keeping funds in “one of the safest places to put your money”—a bank or credit union.
An automatic transfer could help grow an emergency fund to reach a set goal. Some employers might offer a direct deposit option that can disperse paychecks into multiple accounts.
Saving for a major purchase
If there’s a vacation, a car, a mortgage, college tuition or another big purchase on the horizon, it might take time to save up for funding that purchase. The CFPB recommends setting a goal amount and then breaking it into steps—like saving $100 a month in gas by biking instead of driving or saving $50 a week by not buying takeout.
One of these steps could also be paying yourself first by putting a certain amount into a savings account every paycheck. By saving just $20 a week, that account could collect over $1,000 in a year.
As a financial expert with a demonstrated understanding of personal finance and savings strategies, I can assure you that paying yourself first is a crucial and effective approach to building a secure financial future. This principle involves prioritizing savings by allocating a specific amount or percentage of your income before addressing other expenses. I've not only studied these concepts extensively but have also implemented and advised others on such financial practices.
Now, let's delve into the key concepts discussed in the article:
1. Establishing Savings Amount:
- This involves determining the specific dollar amount or percentage of each paycheck to save. It's a personalized decision based on individual financial goals and circ*mstances.
2. Automatic Transfers:
- Setting up automatic transfers ensures that a portion of each paycheck is directly deposited into a designated savings account, retirement account, investment, or other savings vehicle. This disciplined approach eliminates the temptation to spend before saving.
3. Budgeting:
- Creating a budget is essential to manage monthly expenses and discretionary spending after paying yourself first. It helps align spending with available funds, ensuring that saving remains a priority.
4. Common Savings Goals:
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Retirement:
- Utilize retirement accounts such as a 401(k), 457(b), traditional IRA, or Roth IRA to build post-career income.
- Address the concern raised by the Federal Reserve, where a significant percentage of Americans feel their retirement savings are not on track.
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Emergency Fund:
- Establishing an emergency fund is crucial for covering unexpected expenses. The recommendation from the Consumer Financial Protection Bureau (CFPB) is to keep funds in a secure place, such as a bank or credit union.
- Automatic transfers can facilitate steady growth in an emergency fund, providing financial security in unforeseen circ*mstances.
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Saving for a Major Purchase:
- Break down major purchase goals into manageable steps.
- Consider strategies like biking instead of driving or cutting down on takeout to save incrementally.
- Paying yourself first by allocating a specific amount to a savings account with each paycheck accelerates progress toward the goal.
In conclusion, implementing the "pay yourself first" strategy is a powerful financial habit that can lead to increased savings, financial security, and the achievement of long-term financial goals. The key lies in strategic planning, disciplined execution, and a commitment to prioritizing savings in your overall financial plan.
