“Pay yourself first.” We’ve all heard the phrase. The funny thing is that when done correctly, it actually works wonders. Paying yourself first doesn’t mean to simply take a chunk of your take home pay and do whatever you want with it. It means to set aside a predetermined amount of money each paycheck for future use, such as for retirement or for an emergency fund. The saying has been around for quite some time but with today’s technology it’s easier than ever to implement.
How often do you check your bank account? If you’re like me it’s probably pretty often, maybe even daily. I am frequently checking to see how much I have in my account. By knowing how much I have in the account I know exactly how much I can spend before the next paycheck. That’s what money is for, right? But if the account is running low I can’t spend much. It’s hard to spend money that you don’t have and by paying yourself first you are only able to spend what’s leftover. If push comes to shove and my balance runs too low I can go a pretty long time without spending. I bet you can as well. By paying yourself first you’ll really cut down on unnecessary items due to the simple fact that you just don’t have that money burning a hole in your pocket.
Paying yourself first is actually quite simple yet not many people take the time to do it. It’s similar to how taxes are taken out of every paycheck. Over time you just learn that it’s a fixture and you get used to it. Follow the simple steps below and you’ll be paying yourself first in no time.
1. Determine how much your take-home pay is per month
2. Determine how much your typical expenses are per month
3. Take the difference between the two numbers above. Now, use this number as a reference to assist in determining how much you want to pay yourself each check.
4. Setup an account that is outside of your normal checking account. This could be a savings, retirement, or brokerage account.
5. Start depositing the amount that you calculated in step 3 into the new account every month (or paycheck). Use direct deposit whenever available as this will make things much easier.
As you probably guessed the trick is to never see the money in the first place. Right now you probably have automatic bill pay for certain expenses. Maybe your Netflix account is paid each month without you lifting a finger. Or perhaps you’ve setup your electric bill to automatically be paid each month from your checking account. Well if you haven’t been paying these manually and the lights still come on when you get home, odds are that you’re utilizing automatic payments. People may not even realize all of the different bills that they’re paying through this method as it’s very easy to forget about them.
Real life story – I once made 28 consecutive months of payments for renter’s insurance on an apartment that I didn’t even live in. Twenty-eight. That money could have been spent in so many different ways had I just known about it. After I moved out of the apartment I forgot to cancel the insurance. The policy just kept renewing and I assumed it was for my current apartment. Luckily the company refunded me after I proved that I didn’t live there. All of a sudden I had an unexpected windfall of $515.68. In a very strange way this is similar to paying yourself first. Paying yourself first is basically making automated bill payments, but rather than having your money go toward routine expenses, the money is being saved for the future.
Again it’s hard to spend money that you don’t see. The best practice would be to increase how much you pay yourself whenever you get a raise. This will cut down on lifestyle creep and will ensure that you’re living within your means. Try not to check the balance of the newly created accounts too often. This way you don’t even see how much is going in there, and won’t be tempted to pull any out for spending.
After reading this you’re probably wondering, “why take advice from someone who went nearly two and a half years making payments for insurance on an apartment he didn’t even live in?” Well, through my mistakes I’ve become much wiser and also better about my spending habits.
How about you? Are you currently paying yourself first?