Paying yourself first is one of the best ways to save money.
As we discussed in a previous post, the percentage of your earnings that go to your housing costs are one of the key indicators that you may be living beyond mean. Another major sign in the inability to save money. According to CNN Money, 47% of Americans would struggle to come up with $400 to cover an unplanned expense and nearly half of today’s workers are living paycheck-to-paycheck. In this follow up post, with the help of CNN Money, we’ll discuss paying yourself first, one of the best strategies to becoming a better saver.
Paying yourself first means treating savings like an important bill — just like your rent or mortgage — that must be paid every month. The only difference is it’s a bill you pay to yourself. Sound difficult? Here are a few tips:
Set a personal payment goal.
Lets face it, few things are a better motivator than clear defined goals, such as paying for a vacation or saving for a college education. If you know you can only pay yourself a small amount right now, look for opportunities to increase these payments in the future. Determine how much of your monthly salary you need to set aside to meet those goals. Then, find ways to make changes that will impact your expenses in the long-term.
If you decide, for example, that you can manage without premium cable channels, update your plan the next time your contract is up and put the difference toward your savings goals.
Set up automatic payments
Unless you’re proactive, most likely the amount you would have intended to save will dwindle toward the end of the pay period.
“The reality is that some competing interest always comes up to reduce if not eliminate well-intended savings,” says Howard Pressman, a Virginia-based financial adviser. That’s why one of the principles of paying yourself first is to set up automatic payments into accounts set aside for retirement, debt repayment, or emergency savings. That way you don’t have to consciously think about choosing to save, and won’t be tempted to spend it first.
“If one has automatic savings taking place into a retirement account or from checking to savings, it’s going to get done,” Pressman says.
Change your mindset
Once you decide to pay yourself first, you may feel like you have a lot less money at your disposal than you once did. The key is to change the way you think about your income, and accept that you need to — and can — live off less.
“It’s really about fooling your brain into thinking ‘this is how much I make and this is what I can spend,’ said Jeff Maas, a California-based financial adviser. “Eventually you will adapt your spending habits to match your perceived income and it won’t feel like a chore or a sacrifice to save.”
Maybe we can help you get your savings off to a great start with tax refund that may have been missed. Send us an email or give us a call today.