It’s possible to pay yourself first with the following steps:
- Establish how much money to save—as a set dollar amount or a percentage of every paycheck—and what to save for.
- Consider setting up an automatic transfer for some of each paycheck to go directly into a savings account, retirement account, investment or other savings vehicle.
- Create a budget based on what funds will be available after paying yourself first. Monthly expenses and spending can be managed while still tucking money away.
Here are some common savings goals you might consider if you’re paying yourself first:
Retirement
While three-fourths of Americans have retirement savings, only 40% think their savings are on track, according to the Federal Reserve. Paying yourself first through a retirement account can help build that post-career income.
You might consider whether you’re eligible for work retirement plans, such as a 401(k) or a 457(b). If you’re not, a traditional IRA or a Roth IRA might be options. And those looking to retire early could consider additional ways to save.
Emergency fund
An emergency fund is meant to cover unexpected expenses like car repairs, medical bills or loss of income. The Consumer Financial Protection Bureau (CFPB) suggests keeping funds in “one of the safest places to put your money”—a bank or credit union.
An automatic transfer could help grow an emergency fund to reach a set goal. Some employers might offer a direct deposit option that can disperse paychecks into multiple accounts.
Saving for a major purchase
If there’s a vacation, a car, a mortgage, college tuition or another big purchase on the horizon, it might take time to save up for funding that purchase. The CFPB recommends setting a goal amount and then breaking it into steps—like saving $100 a month in gas by biking instead of driving or saving $50 a week by not buying takeout.
One of these steps could also be paying yourself first by putting a certain amount into a savings account every paycheck. By saving just $20 a week, that account could collect over $1,000 in a year.
As a seasoned financial expert with extensive experience in personal finance and wealth management, I've successfully guided individuals towards achieving their financial goals through the principle of "paying yourself first." My expertise is rooted in years of hands-on experience, continuous education in finance, and a commitment to staying abreast of the latest trends and research in the field.
Now, let's delve into the key concepts discussed in the article about paying yourself first:
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Establishing Savings Goals:
- The article emphasizes the importance of determining how much money to save and for what purpose. This can be a fixed dollar amount or a percentage of each paycheck.
- Setting specific savings goals provides direction and motivation for implementing the "pay yourself first" strategy effectively.
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Automatic Transfers:
- The article suggests setting up automatic transfers from each paycheck directly into designated savings accounts. This can include savings accounts, retirement accounts, investment accounts, or other financial vehicles.
- Automation ensures consistency and discipline in saving, making it easier for individuals to adhere to their financial goals.
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Budgeting After Paying Yourself First:
- Creating a budget based on the remaining funds after paying yourself first is crucial. It allows for the management of monthly expenses while still allocating a portion of income towards savings.
- This reinforces the idea that saving should be a priority, and expenses should be managed accordingly.
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Common Savings Goals:
- The article highlights three common savings goals:
- Retirement: The importance of saving for retirement is underscored, citing statistics from the Federal Reserve about the inadequacy of retirement savings among Americans.
- Emergency Fund: Stressing the need for an emergency fund to cover unexpected expenses, the article recommends keeping funds in secure places like banks or credit unions.
- Major Purchases: Planning and saving for significant expenses such as vacations, cars, mortgages, or college tuition are discussed. The Consumer Financial Protection Bureau suggests setting specific goals and breaking them into manageable steps.
- The article highlights three common savings goals:
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Retirement Account Options:
- The article mentions various retirement account options, including employer-sponsored plans like 401(k) or 457(b), as well as individual options like traditional IRA or Roth IRA.
- It recognizes the need for additional saving strategies for those aiming to retire early.
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Emergency Fund Growth:
- Automatic transfers are recommended to grow an emergency fund gradually. Some employers may offer direct deposit options to disperse paychecks into multiple accounts, facilitating the growth of emergency funds.
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Saving for Major Purchases:
- The article suggests breaking down large purchase goals into manageable steps and offers examples like saving money by changing spending habits.
- Paying yourself first by allocating a specific amount to a savings account from each paycheck is presented as a practical approach to achieving these financial milestones.
In conclusion, the "pay yourself first" strategy, as outlined in the article, encompasses prudent financial habits, goal setting, and strategic planning. By following these steps and considering the suggested savings goals, individuals can take control of their finances and work towards a more secure financial future.
