When it comes to 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. If 10% seems like too big of a stretch, then start with any percentage you’re comfortable with. Something 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 is to apply a portion (I recommend at least half) of any pay raises you receive along the way. Just remember, the more aggressive you get with that percentage, the quicker you’ll reach your financial goals.
Automatic Vs. Manual Savings: Which Should You Choose?
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.
“Save one-third, live on one-third, and give away one-third.” – Angelina Jolie
A simple financial principle that many people don’t incorporate into their budget is to consider that saving money is an expense. Some people may have a hard time understanding the idea of paying yourself first, let alone applying the concept. 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! And the key to accomplishing that is to consider your savings to be an expense.
If you treat saving like an expense in your budget, then paying yourself first becomes less challenging. In other words you will be paying yourself first by treating your savings like a bill as you would any other bill, but make it the most important bill to pay. Make it the first bill you pay over any other bill. What can be more important than you? I know what you’re probably thinking, if I do that, something will have to go without getting paid. And if that’s the case, then it will 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 expenses don’t go un-paid. One thing is for sure, there can’t be financial freedom if you don’t pay yourself first.
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