You probably already know that the best way to get ahead financially is to save money. Although this can seem daunting, there is an easy way to do this: pay yourself first. This means you pay yourself each time you get a paycheck—yep, before you pay your bills.
If you’re in debt or living paycheck to paycheck. you may now be thinking: there’s no way I can do this. But, fear not! It can be done, no matter what your finances look like right now. Here’s a foolproof 5-step plan to show you how to pay yourself first.
Step 1: Create a budget
A budget is important for many things, like figuring out how to cut costs and create a spending plan you can stick to. But, let’s simplify things. Think of a budget as a tool to find out just how much money you can afford to save.
The best-case scenario is that, after all your bills and living expenses are paid for, you’ll have money leftover to save. Yet, it’s also possible that you’re spending every last penny of your paycheck and don’t have any wiggle room to save.
Even worse, maybe you’re already spending more money than you earn each month. If this is the case, don’t panic—there are ways to fix this! To start, focus on cutting your expenses while also earning more money.
Step 2: Define your savings goals
You wouldn’t set out on a road trip without a map, so don’t start saving money without a mapped out plan! If you know exactly what you’re trying to save up for and develop a savings plan to get there, you’re far more likely to reach your goals.
Having two sets of savings goals—long-term and short-term—can also help you parse out how much you need to save.
Long-term goals can include things like saving for retirement. You don’t necessarily need to know exactly how much you’ll need since it’s so far in the future. But, you know it’ll be a lot, so it’s a good idea to set aside a certain percentage of your paycheck.
Short-term goals can include saving up for a vacation or Christmas gifts. You probably have a good idea of how much you need and how much time it will take you to save for these goals. Pro tip: For each short-term goal, divide your savings target by the number of months you have to save. This will tell you how much you should be saving each month.
For example, my family wants to spend $500 each Christmas. So, we set aside $45 per month starting in January so that when November comes, all we have to worry about is spending the money!
Step 3: Automate your savings
It’s easy to put off making a bank transfer each month from your checking account into your savings account. There are always excuses you can come up. Trust me; I am the excuse master.
Instead, take the control out of your hands. Schedule a recurring transfer each month into your savings account. If you schedule the transfer right after you get paid, you won’t even miss the money.
Consider an app that saves money automatically like Chime. Chime’s automatic savings deposits 10% of your paycheck every time you get paid. This 10% will be deposited right in your Chime savings account.
No more excuses. It’s time to do this!
Step 4: Watch your bank account
It’s a good idea to keep an eye on your bank account, especially as the end of the month nears. This is when funds are often running low. You may not be used to cutting back on your spending and sticking to a budget, and besides, unexpected expenses always pop up.
One thing you don’t want to have happen is an overdrawn account. So, watch your bank account. You can even make it easy on yourself by setting a reminder to check your account each day or download an app such as Mint that’ll give you quick snapshots of your bank account and budget.
Step 5: Stay one month ahead on expenses
The easiest way to avoid overdrawing on your account is to get one month ahead on your expenses. I know – it’s easier said than done. But, you can do this.
To start, treat this like a sort of savings goal on its own and start saving more than you have to for your expenses. You can even factor this into your budget.
Getting one month ahead on your expenses is an all-around good idea as you won’t fret about overdrawing your account at the end of the month. It also protects you financially in case there’s a sudden interruption in your income—say, if you lose your job or get into an accident.
We know following a money-saving plan isn’t easy. But, if you follow these 5 steps, you won’t just have an automated plan to pay yourself first. You’ll have a holistic plan that will help you reach your savings goals. In the long-run, this will make your life easier. And, you can consider this free advice.