A lot of people have a hard time understanding the phrase “pay yourself first”, let alone applying the concept. I’ll admit, even I struggled with it when I first heard it. Let’s face it, after paying the rent/mortgage, utilities, car payment, insurance, credit cards, etc., more often than not, there is never anything left over to save. That’s all the more reason to PAY YOURSELF FIRST, before anything or anyone else gets paid! Think of it this way….consider your savings to be an expense. In other words, treat saving like an expense in your budget and treat it like a bill as you would any other bill, but make it the most important bill to pay. The FIRST bill to pay! Now, I know what you’re thinking. If I do that, something will have to go without getting paid. And although that would be a true statement in that moment, what it does is force you to look harder at what you could cut back on, find discounts for, and/or even figure out how to increase your income in some way so those lingering expenses don’t go un-paid.
How Much Money Should You Save?
Saving money is the first step to financial freedom and unfortunately it’s something that many people struggle with. They struggle because they don’t have a plan for how to save and how much to save. The “how to” for saving comes from instilling the habit of paying yourself first. Once you come to realize “how”, then the question becomes “how much”? When it comes to saving and paying yourself first, the typical rule of thumb is to save at least 10% of your income. 10% is an ideal place to start and over time, if possible, gradually increase that amount. With any increases in income along the way, you may be able to eventually work your way up to even save 20% or more.
If 10% seems like too big of a stretch, then start with any percentage you’re comfortable with. Saving any amount, even the smallest amount is always better than nothing, but make that effort to increase that percentage as much and as often as possible to the 10% minimum. A commonly used strategy to help gradually increase the percentage of how much of your income you save is to apply a portion (I recommend at least half) of any pay raises you receive. Just remember, the more aggressive you get with that percentage, the quicker you’ll reach your financial goals.
“A cardinal rule in budgeting and saving is to pay yourself first. Once your paycheck hits your account, wisdom has it that you should move some amount to savings even before you pay the bills.” – John Rampton
There are a couple of strategies to save money depending on your situation and personality. One way is through self discipline, by being able to manage your money without being tempted to spend before you save or spend what you save. This is more of a manual approach to saving and paying yourself first. If the manual approach of self discipline doesn’t work well for you, the automatic approach by utilizing your employer’s payroll deduction program is another helpful strategy. If that is an available option for you, arrange for a fixed amount to be deducted from your paycheck into whatever retirement and/or savings plans your company may offer.
With the automatic approach the funds will be sent to your account(s) by your employer before you even get your check. Having money taken out of your check through payroll deductions before you get your pay is the simplest way of making sure to pay yourself first. Not to mention the added benefits of being pre-tax deductions and in some cases employer matched. No matter which strategy you choose, whether the manual approach of self discipline or the automatic approach of payroll deductions, the end result is the same. Saving by paying yourself first means exactly that, and it is the one proven, simple way to financial freedom and wealth building.
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