If you’ve ever read anything about personal finance, you have probably heard about the saying “Pay yourself first”. But what does it mean and why should you do that?
The truth is that, while this concept is widespread especially in the US, not many people follow this idea. According to research, Americans don’t have much savings, especially at a younger age. That being said, this concept is worth following for a variety of reasons.
What does “pay yourself first” mean?
The concept of paying yourself first means you should treat yourself and your financial future with the highest priority. More specifically, it means that whenever you receive your salary, you should take one portion of it and direct it towards either a savings account or a retirement plan. Then you can start spending the rest of your money on other things.
You can have several purposes for your savings account, from creating an emergency fund to saving for retirement or buying a house. Whatever your long term goal is, the concept of paying yourself first applies to all of them. You should treat your savings like any other expense and prioritize it.
The best way to implement this concept in your life is to create automatic payments. This way, you don’t even need to think about it. As soon as you receive your paycheck, a set amount of money will go automatically in a specific savings account or retirement plan, whatever it is you are creating.
Why should you pay yourself first?
There are many reasons why it’s beneficial to set aside a certain amount before anything else.
You are less tempted to spend: if you save that certain amount first thing as soon as you receive your paycheck, you will be less tempted to spend it. That means you should forget you even have that savings account and not withdraw from it except for the purpose you created it for.
You are less stressed: not having any savings can be stressful. Knowing that if something unexpected comes up you won’t have the financial means to deal with it can weigh on your mental health. On the other hand, having some savings will give you peace of mind.
You become more disciplined: implementing this habit will help you become more disciplined with how you use your money and more conscious of your expenses. It may even help you become more frugal if paying yourself first means giving up a few treats.
You become financially independent: In the long run, if you do this regularly, you may even become financially independent, meaning you won’t need to rely on an income to pay your bills and cover your living expenses.
Paying yourself first may be complicated, especially when struggling with your bills and other expenses. Creating a monthly budget can help you to start saving and will give you an idea of how much you can save each month.