Saving money may seem like a big challenge, especially if you are caught up in the spending frenzy of our consumerist society. But if you cool down and think, it’s not difficult to find ways to save money. Our regular money saving tips series highlights simple strategies you can use to help you. This week we look at a piece of advice you probably heard before – pay yourself first.
What Is “Pay Yourself First”?
The pay yourself first principle was first explained by George Clason in his classic The Richest Man in Babylon – one of our recommended finance books. Since the book’s original publication in 1926, the phrase “pay yourself first” has been thrown around by many financial advisors. But what does it really mean?
Pay yourself first is a financial principle that involves saving money (paying yourself first) before spending it. It means you make the contributions to your saving funds and investment portfolios a priority. You don’t let frivolous spending eat away at your paycheck and jeopardize your financial future.
How Can This Help Me Save Money?
The enemy of saving has always been spending. Saving money would never be a problem if our poor spending habits didn’t get in the way.
The pay yourself first principle can be very effective if applied consistently. By saving and investing your money first, you ensure that your savings and investing obligations are met every month. You force yourself to save money, even if that’s not something you would normally do.
Getting Started with Paying Yourself First
So what’s the best way to implement the pay yourself first principle? First, you need a budget. A monthly budget will help you figure out your income and expenses. When listing your expenses, it’s important to distinguish between those that are necessary (like debt repayment, rent, bills, groceries, etc.) and those that are not (eating out, alcohol, entertainment, new clothes, etc.). Always try to minimize your unnecessary expenses.
After you have a budget, determine what you are going to do with your extra cash flow. Does your emergency fund need a boost? Do you need to start saving for next year’s family vacation? What about your retirement portfolio? Those are all great financial goals to work for. Set a monthly amount you are going to save or invest.
The pay yourself first principle dictates that you put money in your savings accounts or investment portfolios as soon as you get each paycheck. To help you with that, set up reoccurring automatic transfers. Almost all banks and other financial institutions offer this service. For a list of some excellent savings account options, check out our best savings accounts page.
Schedule the transfers to your savings accounts or investment portfolios immediately following your paycheck deposits. This automatic system will force you to pay yourself first and leave no room for your spending tendencies to get the best of you.
If you missed our previous article in the money saving tips series, you can read it here (it covered how keeping your lifestyle unchanged after a pay raise can help you save more money).
Do you pay yourself first? Are you consistent with it, or is it something that needs improvement? What is the best method you found that helps you stay on track?