Hi my name is Amy Matt and I am really fond of personal finance articles. Why? Because there was a time in my life when I was suffering from a huge debt and I managed to be a fighter and survive. Today I am very excited to come over @ From Debt to Dreams.
Paying Yourself First – The Most Important Step
Commit part of your check to savings and investment before you pay anything else. What does that mean, and why is it vital to your financial health? Why does every single financial guru recommend this? We will analyze the importance of paying yourself first, and provide suggestions on how to make it happen for you.
The first step is to make a budget. If you already have one, kudos – you’re 1 in 3 in this consumer-driven world (De Groot, 203). The budget will give you a clear picture of how much you can safely save and invest every month, but it will not be the benchmark by which you make your goals. Budgets are ideal to give you a snapshot of your money, and where it’s going.
What Does It Mean?
Paying yourself means understanding your dollar in a different way. Each dollar can be broken down into expenses. Ten of the 100 cents goes toward this bill, 25 cents to that, 18 cents to this. Understanding that 20 to 50 cents of every dollar ideally must go to you helps you understand what it means to pay yourself first. It gives you a percentage that you can apply to each paycheck. The result of that percentage is the amount of money you must set aside every single paycheck.
Can’t pay yourself much? There are ways to increase your amount by practicing a little financial discipline.
Accounting firms understand that money is a tight concept with not much abstraction. Money comes in and then it goes out. That is why forensic accounting always catches mistakes, and always uncovers what went wrong, why it went wrong, and where it went awry.
A few brief ideas: pack a lunch instead of eating out, carry snacks with you to avoid trips to the convenience store, never go grocery shopping hungry, use lists when you go shopping to avoid impulse spending, and use the snowball method to squash your debt. Small discipline-building exercises like these will increase the amount you can pay yourself every paycheck.
Why Is It Vital?
Paying yourself first is vital for a couple of reasons. First you must understand that you may not be able to work until you die. Not that any of us want to, but understanding that puts things into perspective. Second, after your expenses are paid there may not be anything left over to save.
Paying yourself first guarantees that you will have savings, and a cushion to feed your retirement. Even with careful planning “what’s left over” may be $0, and it will certainly be inconsistent month to month, and year to year.
How Do I Do It?
With options like direct deposit, and automatic deductions it is easier than ever to set up an automatic savings plan. You can coordinate with your bank to place a percentage of the direct deposit into a savings account. You can set up payroll deductions for a retirement plan at work, like the 401(k). The benefit with workplace retirement plans is matched contributions. Your employer will match your contributions to a certain point, or in other words they give you free money.
Tatiana Morales of CBSnews.com (2005) says you can also think of your money in terms of time. The average person is saving only 4 percent of their income, which is equivalent to 22 minutes per workday. If you appreciate that an hour to an hour and one half per day is devoted exclusively to your savings, you can set yourself on a course of paying yourself wisely.
The Internet provides tools that can give you an idea of the long-term effects of paying yourself first. A “Pay Yourself First” calculator provides you a number, something to set a goal by. The rest will be up to you.
Up To You
Whether you are young or old the principle of paying yourself first is vital to your financial health and safety. Youth can afford, for the first years, to pay themselves little, increasing over time. For those coming within ten to twenty years of retirement the principle is the same, but the rate of savings must be increased.
A person in their twenties can get away with saving between 5 and 15 percent of their income, but a person in their 40’s or 50’s needs to be saving 25 and 50 percent. Whatever it takes, do it. You will not regret it. Like physical exercise there are substantially more benefits to paying yourself than there are negative. Sometimes nothing negative comes at all. Now get going!
Morales, T. (2005, January 6). ‘Pay Yourself First’ – CBS News. Retrieved March 17,2014, from http://www.cbsnews.com/news/pay-yourself-first/
De Groot, M. (2013, January 3). New Gallup poll shows two-thirds of Americans do not budget | Deseret News. Retrieved March 17, 2014, from http://www.deseretnews.com/article/865581100/New-Gallup-poll-shows-two-thirds-of-Americans-do-not-budget.html?pg=all