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. Treat it as an expense in your budget. In other words, treat your savings (paying yourself first) 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, for that moment, that would be a true statement, 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.
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.
There are a couple of ways to go about paying yourself first depending on your situation and personality. If you have the discipline of being able to manage your money without being tempted to spend before you save or spend what you save, then a more manual approach to paying yourself first can work. It’s actually the approach that I found works for me. If not, utilize your employer’s payroll deduction program, if available, and arrange for a fixed amount to be deducted from your paycheck into whatever retirement and/or savings plans your company may offer. These 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. Whichever strategy you choose that works for you, paying yourself first means exactly what it says, and it is the one proven, simple way to financial freedom and wealth building.
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