Building profitable habits means paying yourself first. And yes, it is that simple of a strategy.
You might find yourself living paycheck to paycheck and seem to have no money left over after paying bills. Perhaps you’re just telling yourself you don’t need to worry about an emergency savings fund because you’ve been one year emergency free. OR, alternatively, maybe you are always intending to put some little extra cash in your reserve accounts, but by the time the end of the month comes, you’ve forgotten…again.
If you really want to build wealth, paying yourself first is important for growth. But, what does this really mean? Paying yourself first is, before paying any bills or purchasing any groceries or anything else, putting money aside into a savings, reserve or retirement account or something similar; it’s ensuring you’re providing a future cushion for yourself.
It can be difficult to imagine withholding money from your paychecks to put into your bank account every month when you already feel like you are pinching pennies week to week. It seems to be a common worry that if you don’t put your income toward bills and other obligations first, you won’t have the money to do it later. This becomes an issue, though, when you fail to ever invest in yourself due to this fear. The good news is that there are different ways to pay yourself first without worrying about whether or not your refrigerator will be full next week.
First, know the importance of developing this habit. While there are recommendations for how much you should put aside from each paycheck, you can still get yourself ahead by putting aside something from each payment.
Whether you are submitting the funds to a 401K/IRA or an emergency savings account, you should always be prepared and financially ready for the unexpected. Look into savings and investment accounts that accumulate interest quickly for you. This handy calculator tool will help to give you an idea of what rates to find.
The best way to build a strong consistency is by choosing a set amount or percentage of your income each month. That way, you already know what to expect and don’t have to even think about it each time. Start with an amount that is realistic to you, and grow it over time. In order to decide how much to put aside, you need to evaluate your monthly net income. Be sure to subtract both fixed and variable expenses (monthly bills, loan repayments, gas for your car, entertainment, etc.) from your gross income to see what you bring in monthly. If your paycheck fluctuates each time, use your average income over the last six months. When you see what is left over, choose an amount you know you can do each month. Try shooting for 10-20% of your take-home amount. If this still seems like too much, start off small, but make a goal to increase that number every year.
You do not have to choose the same type of savings each month or you could easily divide your chosen amount among different accounts (like your retirement and that emergency fund we keep talking about). If applicable, set up your bank account to transfer funds automatically on your payday (or the day you expect your paycheck to be deposited). Then, you won’t even have to think about it, and it won’t seem as “painful.” Another option is to split your direct deposit with your determined amount to go directly to your savings account. The key is to attempt to make it automatic so that you do not forget.
Make cuts in your life.
It’s easy to get carried away with little expenses here and there. You know, those things that aren’t even close to being necessities like going out for happy hour. Even your periodic coffee stops can add up. We aren’t saying cut all of these things from your life entirely, as it is nice to indulge from time to time; just recognize how often you are doing these activities that are costing you more than what they should be each month. Creating a budget is key.
You can even reduce your fixed expenses as well. Looking into consolidating your debts, downgrading your cell phone plan and getting rid of cable are just a few options on ways you can cut some other costs in order to pay yourself more.
Paying yourself first is really simple and does not take a lot of your time. Convince your mind you need to do it, follow through and your future self will thank you.
Is this something you currently do? Do you plan on starting?