Paying yourself first is one of the easiest ways to get your financial situation in order. But for many people, this strategy, also known as money’s Golden Rule, is difficult to implement.
Here’s how it works. When you get your paycheck, deduct a set amount, such as $50, $100 or whatever amount you can afford, and immediately put that money into a savings vehicle before you pay any bills or expenses.
Unfortunately, many people do the exact opposite. They first pay for groceries, utilities, the mortgage, bills and taking the family to dinner or the movies. They have the best of intentions, planning to put any remaining money from their paychecks into a money market account, certificates of deposit (CDs), or other interest-bearing savings accounts.
The reality is there is rarely any money left. All that remains is the promise to do better next pay period. But when the next paycheck arrives, the cycle plays out the same. What you’re left with is no cushion or safety net if the unthinkable or unexpected occurs.
By paying yourself first, you can use that money to create an emergency fund, save up for big-ticket items, increase your contribution to a retirement plan, generate a sizeable down payment for a new house or car, or any number of other things.
In a 2014 survey, Bankrate discovered that many Americans were not prepared for life’s unexpected events, such as an unforeseen illness or injury, or a job loss resulting from another downturn in the economy. Bankrate’s Financial Security Index for June 2014 found that 25% of Americans didn’t have any cash reserves set aside, and another 25% only had enough funds to cover three months’ of expenses. (Source: Allison Ross. “Financial Security Index: Saving for a rainy day.” Bankrate.com > Financial Literacy > Financial Security Index. http://www.bankrate.com/finance/consumer-index/saving-for-a-rainy-day.aspx)
As a general rule, most experts say you should have at least six months’ worth of funds available. But how can you establish a savings fund, when your paycheck barely covers your cost of living?
- First, you need to know how much money is coming in and how much is going out each pay period. Create a monthly budget to see what you’re spending and where. Look for areas where you can cut back and dedicate those funds to your savings.
- Determine how much you can set aside from each paycheck, based on the budget you’ve created, including funds from any cuts you made. Don’t worry if you can only afford to designate a small amount each payroll. The important thing is to get the savings habit started. You want to take advantage of compounding effect over time – the longer your money is in your savings account, more and more interest builds up, creating a healthy balance. Besides, you can always increase the amount you’re saving as your financial situation improves.
- Get with your trusted financial services representative to find the right savings vehicle to meet your needs now and in the future. Do you want to retire and live by the beach? Do you have three children you want to send to college? Or, do you know that your car needs new brakes? No matter what the scenario, your financial representative can help you determine your short- and long-term goals and suggest suitable products and services to help you find a strategy that’s right for you and your family.
- Use automatic payroll deductions to put the amount you’ve designated directly into your savings vehicle before you get your hands on it. This removes the temptation to spend that money on something else.
When you make saving money a priority, you say that your future is important. Paying yourself first ensures that your future needs will be met, and you’re on your way to achieving financial security.
Golden or not, paying yourself first is a worthy rule by which to live your life.
“Are you paying yourself first? You should be, and here’s why” is the first post of First Financial Security, Inc.’s new blog, Financial Security First. Several times each month, we’ll post helpful, relevant tips, strategies and information to help you gain control of your finances and create a better financial future for you and your family.