Pay Yourself First, the Money habit that can boost Wealth
Is your paycheck a magician, performing a disappearing act? One second you have a chuck of money in your back account and the next you scrounging under the couch for change. This can sound like a cruel joke to most poeple, Unless you decide to pay yourslef first , between bills and debt it will always feel like you can never get ahead.
But most people would argue that, how can you pay yourself first when the government taxes you first. Doesn’t that mean the government is getting payed first. I say that’s besides the point, the concept of pay yourself first is based on the payment that you get after all other deductions. We talking about the money that goes straight into your bank account.
Pay-Yourself-First is a philosophy that can help build tremendous wealth if you make it a habit. It’s one of the oldest rules in personal finance and you’ll find it on all the money books. But the chances are you probably never heard about it, unless you into money books.
The pay-yourself first is a philosophy that is a bit hard to follow, coz you can use that money to do other things, like paying some of your bill, or buying something that you like. You have probably tried it once or twice in the past, but it’s easy to forget. Since you don’t keep a budget, so when pay day comes your money just rolls itself elsewhere.
Pay yourself first is an investor mentality, which means routing contribution from your paycheck to your savings accounting automatically every month before you begin paying your monthly expenses. Which means you pay yourself first before you pay anything else like rent or buying groceries?
What’s behind the Philosophy, Pay-Yourself-First
It’s about promoting the quality of being economical with money. To ensure enough money is saved before expenses or discretionary purchases are made. The concept states, whenever you receive income, you pay yourself first by investing/saving a certain percentage right of the top. The reasoning behind it is that if you pay all your bill and all other ods first in the end you will never have enough money to save.
The Basics of Pay-Yourself-First
Pay yourself first does not refer to how you earn money, on the contrary to what the phrase implies. it refers to how to save money. It means they you should pay your own savings and investment account first.
Most people say they don’t save enough money because they don’t have the money to save more, that’s why personal finance advice says that you should pay into your savings and investment account first and approach it the same way you would approach your phone bill. Prioritize it above all your bills.
The Goals behind the Concept
By paying youself first you’re almost guaranteed to make sure that money is there when you need it. Meaning you wont have to scramble at the last minute. This approach increases the likelihood that you’ll save a substantial amount of money. It converts saving money from a desire into a necessity. It gives you a peace of mind in cases of emergency when money is needed, like a sudden hospital bill.
Why Pay-Yourself–First (Now)
In the real world savig may seem impossible for allot of people, you have rent or bond to pay, groceries to buy and loans to pay. Sure you would like to save, but there’s just not enough money at the end of the month. Most people try to save what’s left over after all the bills and spendings.
But if you dont develop a savings habit now, there will always be reason to delay.
Four Reasons to Start now
1. Savings will become a Priority for you.
2. You start developing Good financial habits
3. You will build a cushion to secure your future and financial emergency.
4. Having money for emergency will give you a peace of mind.
The sooner you start the better off you will be, not only will you be able to take advantage of compound growth to help grow your money fast, but you’ll also help ensure that your financial goals are getting funded. Wait too long and a major hospital bill will through you off the tracks.
There are going to be things that you can’t control, so the sooner you start saving the better off you’ll be. Having that money available prevents allot of panic on bad days.
Putting Pay-Yourself-First into Practice
But I can’t Afford
Allot of people say they can’t pay themselves first, they think they will run out of money before the month ends, because they can’t keep up with their bills. But experts say people should commit paying themselves first anyway.
Once they make that commitment then they will be forced to find other ways to pay the bills, like cutting some of their bills. Like disconnect that cable TV you don’t really watch, get something cheaper.
How to Overcome the Challenges of Savings
The real hurdle to developing this habit is finding the money to save. Although most people believe it’s impossible, i believe that everyone can save at least 1% of their monthly income. As soon as the habit kicks in you’ll discover that the process is painless and as time goes on you can increase that percentage to 2%, 3% or maybe even 5%.
5 things You need to do to Help you Pay Yourself First
- Reduce your spending
The first step to reducing your spending is to figure out where your money is going. Second, figure out what you can cut, reduce or downgrade. Most financial advisers say if you really wanna save money all you need to do to avail the cash is downgrade your lifestyle. Third, after all the cutting, downgrading and reduction is done you’ll have to bank the difference.
- Start small
If the first strategy sounds intimidating, the problem may just be a matter of perspective. Its unreasonable to think you can go from zero to hero and a thousands of dollar overnight. Instead try starting small.
And to make the process less painfull set up an automatic transfer for the amount you willing to save. Once’s the habit of savings starts kicking in increase the savings amount bit by bit. It will motivate you when you see it growing.
- Bank your extra money
If you have a side job, go a head a set up a direct deposit so it can go straight into to the savings account.
- If you are a couple leave off one income.
If you are two people working in your house, which means dual income, try to leave off only one of your incomes. In this case you’ll have to directly deposit the other check directly into the savings account. That should enable you to save the most money.
- Automate your account, setup a repeating automatic transfer from your main account to your savings account, it makes the process painless. And the transfer needs to happen before you pay anything else. Needs to be your first payment.
How to Pay-Yourself-First Hands On
If you dont know how much to pay yourself, follow this simple steps bellow.
Determine you current spending
- Start by determining your monthly income, add together all your income sources for the month.
Note that this is your net income after deduction of all taxes. If you have an income that fluctuates month to month then use your average income over the past 6 month.
- Determine your monthly expenses.
The simplest way is to look at your monthly expenses is your monthly bank statement, add all the bills and cash withdrawals.
There are two types of expenses – fixed expenses and variable expenses.
Your fixed expenses are typicaly your rent, utilities which stay the same month to month.
Your Variable expenses may include food, entertainment and miscellaneous purchase, they change month to month.
You need to keep track of your expenses.
- Deduct your montly income from your expenses.
Subtracting you montly income from your expenses will let you know how much left over money you have at the end of each month. If you are negative at the end of the month reduce your expenses.
Now you know how much extra money you left with at the end of the month.
Your next step is to try and reduce your montly fixed expenses and your montly variable expenses and create a budget from that.
Creating a Budget
- You must look at reducing your fixed expenses, take a look at each type of fixed expense and examine if there’s any way of reducing them. Good examples will cable tv, cell phone bills, thet maybe fixed every month but it is still possible to reduce them by dropping down to a cheaper plan. Car insurance contact your broker each year to see if there are better deals.
- Consider reducing your variable expenses. Take a very good look at this montly expense, this is where most of the savings can be done. Look at expenses like entertainment spendings. To redudce this expenses take a look at what you want verses what you need. Look at the areas that you spend allot of your money. Find innovative ways online to reduce your variable expenses.
- Calculate the amount of money you have left over after reduction on expenses. After identifying the areas where you can reduce your spending, subtract that amount form your expenses. Add that extra amonunt to you montly left over money.
Start Paying yourself first
- Decide how much to pay yourself
Now you know how much you have left over every month, you can decide on how much to pay yourself. Experts recomed that you pay yourself from the money you take home, anywhere between 1% to 5%. The best solution is to pay yourself as much as you can from the left over money based on your calculations.
- Set your savings goal
Now that you know how much you can possibly pay your self, set a goal for savings amount. Determine the cost of a goal and devided that by the amount you can pay yourself every month. In that case you can boost your savings amount if you want to achieve the goal in shorter time. Remember that you can also increase you saved amount by putting it in other types of invesment.
- Create a separate account
This account should be created for a specific savings goal to avoid you mixing it with your monthly income money. Consider opening an account with intrest.
- Deposit the money straight into the account.
Make your that you have a portion of the paycheck automatically deposited into your savings account. You can also setup a monthly automatic transfer from your main account. The point is to transfer the money before you spent it on anything else, including bills and rent.
- Leave the money alone
Leave it alone, dont touch it. Don’t take maoney out of this account. Typically that fund should have enough to cover you upto six month. Don’t have enough money to pay your bills, look for other ways to make money or cut your expenses.
Even a small amout has its uses for the future. Start small if you have to and build that habit of saving. Set a goal on how much you wanna save monthly. The idea behind it is that if you don’t save, we somehow always find ways of spending money until we have nothing left. We always find a way of expending our expenses to meet our income. If you cut your income by paying yourself firts then expenses will stay under control. If you can’t find ways to make that extra money or cutting those expenses don’t touch your savings.