Sounds good, right? But, what does pay yourself first mean and why do financial experts suggest that you do this?
What Exactly Is “Pay Yourself First”?
The phrase “Pay Yourself First” can be translated in its simplest form to “Save Money First”. The idea is that you take a portion of your paycheck and stash it away – before you pay your bills, head to the mall to buy a new pair of boots or stock up on groceries.
According to statistics reported by Trading Economics, the average personal savings rate in America in December 2016 was 5.4%. This means that most people save about 5% of the income they receive once taxes are taken out. The statistics in that report also showed that “savings in the United States averaged 8.31 percent from 1959 until 2016.” So, this means that Americans now save less than they used to. This, in turn, should provide more incentive to start beefing up your savings account – starting right now.
Besides eliminating a layer of stress, paying yourself first is also a way of doing your future self a favor. Think of it this way: You’re being kind to the future you who may need a root canal or a last minute flight to a funeral. You’re also ensuring that you can handle other unexpected issues that may pop up down the line.
What’s the Best Way to Pay Yourself First?
I truly believe that saving money is possible on any budget, but the trick is to save immediately when you get paid rather than at the end of the month. Why? If you wait until the end of the month to save what’s left over after paying bills and spending on other stuff, you won’t have anything left to save. Trust me on this one. #BeenThereDoneThat.
If you’re now on board with this idea but you’re still wondering how to put it into practice: start by checking out Chime’s Automatic Savings account. Chime helps you save money without even thinking about it and their “Save When I Get Paid” feature allows you to automatically direct a percentage of every paycheck into your savings account every time you get paid. This simple action helps you create long-term savings habits and stick to them without much effort. You can also keep track of your progress through Chime’s award-winning mobile banking app. Even better, when you set up direct deposit via the Chime app, you can get paid early.
Just think: If you combine automated savings with a commitment to pay yourself first, you can both learn how to budget and increase the amount you’re saving. And, down the line, you’ll thank your younger self as you’ll be busy enjoying your retirement from your condo in the Caribbean.
Why Does Paying Yourself First Work So Well?
Paying yourself indeed comes in handy in an emergency. This strategy can likewise help you reach your future goals. For example, you can pay yourself first now to help you start investing and saving for your retirement.
Author and young millionaire David Bach recently told Business Insider, “When that money is moved before you can touch it, that’s how real wealth is built.” And, it’s even better if you can move your money automatically. According to behavioral finance – which explains the science behind how we think and feel about money – automation is a powerful tool for saving money. When money is out of sight and out of mind, you can’t spend it. It can, therefore, be earmarked towards investments or your retirement account.
If you’re not familiar with automation, it’s a term that means you can set up your bank account to automatically do specific tasks for you, like pay your bills or transfer funds. For example, you can set up your bank account so that your cable bill gets paid automatically to your cable provider. Or, you can also save money automatically by setting up your bank account to place a certain amount of money in savings every time you get paid. As you can see, automation makes it easy and seamless to pay yourself first.
When it comes to saving for your future goals, automation can help you out here as well. In fact, The Vanguard Center for Retirement Research explains that “Trying to save for retirement is not that different from other behavioral modification programs, such as exercising, dieting, quitting smoking, or keeping New Year’s resolutions.” It’s not easy, but it’s not brain surgery either. It just takes a few minutes to set up automatic savings and then a few weeks to get used to living on less.