How about a little truth time! Letâs say you got paid today. All the money has been deposited into your bank account, what is the first thing that you do with it? Do you go shopping? Or maybe you go to a bar? Or you immediately put the money in your savings and retirement accounts? Of the three things I mentioned, which one do you think is paying yourself first?
Money is easy to understand but the fickle thing. Money can buy you virtually any tangible item in the world. The lack of money also makes life and retirement a lot more difficult! Itâs important to understand the fundamentals of paying yourself first in order to achieve great financial freedom and financial Independence!
What paying yourself first means
Paying yourself first means: whenever you get money, you immediately invest a portion of that income into retirement and savings accounts. These accounts include 401k and Roth IRA. Simply put, the first thing you money goes towards is your savings and retirement.
After youâve contributed a portion of your income into the savings and retirement accounts, the rest of the money is then allocated to everyday expenses and entertainment.
See the difference? Instead of saving and investing what is left over, you instead pay yourself first! You make sure that no matter what, your retirement and savings accounts are contributed to you. If this habit is developed earlier on, there is a tremendous opportunity to build incredible wealth!
Why pay yourself first?
Alright, so youâve got all the fundamentals of paying yourself first. You might still be wondering âwhy should I pay myself first?â Itâs simple! By flipping how most people save their money and paying yourself instead, it forces you into a wonderful habit of saving and investing for your retirement!
They are quite a number of perks that come with pay yourself first.
1. Develops good saving habits
If you, like many people out there, find it challenging to start a good habit of saving, paying yourself first will help build this habit. When most people earn an income, the first things that their money goes to are bills, entertainment, and then save whatever is leftover.
The difference with this habit is, instead of saving whatâs left over, you prioritize saving and investing first!
2. Builds an emergency fund
Iâm sure by reading some of my articles and Dave Ramsey for instance, having an emergency fund is absolutely Paramount when it comes to your personal finances. They say to have three to six months of cash saved up just in case of emergencies. Although it might seem like a lot of money to save up, paying yourself first weâll make it almost automatic. This is because you donât have to think about it actively but instead automatically put a portion of your aside for your emergency fund.
I always say this in my other blog posts and Iâll say it again. The reason they call it an emergency is because itâs an emergency! You donât plan for emergencies but you can prepare for them. So if you find it hard to save up an emergency fund, then try to pay yourself first and build an emergency fund over time.
3. Builds your retirement fund
Similarly to how paying yourself first helps in building an emergency fund, it also helps in building your retirement fund. Building a retirement fund is the last thing on peopleâs minds especially earlier in their life. But hereâs the thing with retirement. The earlier you start saving, the more you will have. The later you start saving, the less you will have.
According to Northwestern Mutual, 22% of Americans have less than $5,000 saved for retirement, and nearly half of working adults (46%) expect to work past the traditional retirement age of 65. You know what the statistic tells me? It tells me that retirement is not a concern for most.
By paying yourself first and contributing to retirement funds like a 401k or a Roth IRA, you can Safeguard yourself and your family for when and eventually you retired. We are human beings, and human beings tend to grow up and get old. We will all eventually retire but we donât want to retire broke! Always make sure to make this a priority for yourself.
How do you pay yourself first?
The best way that Iâve learned to pay for myself first is to make it as easy as possible, and as painless as possible. You simply do this by automating your finances and having your income automatically deposited into the necessary accounts.
Most employers allow employees to designate a portion of their income to be deposited into certain accounts. So you can start off by giving your employer percentages off money to contribute to your 401K, Roth IRA, and emergency account.
If your employer cannot do this, or your savings accounts do not allow direct deposit, you can always set automatic money transfers within your bank. By automating this, it ensures that you donât ever forget to do it, and as time goes on you get used to you not having that dollar ammount in your checking account.
The idea here is to not only make it as automatic and easy as possible but you also not have these funds linger in your checking account. If youâre anything like me, you will be tempted to withdraw that money and spend it unnecessarily.
So here are some fine tips to help you get started:
- Remember, if your employer offers a 401k retirement plan (or something similar), enroll asap and begin contributing to it! If they offer contribution matching, always make sure you contribute enough to get the match! Itâs free money, donât let it go to waste!
- Open a Roth IRA and contribute to it. This account allows you to contribute after-tax income and have it grow tax-free. The sooner you start contributing to this, the more wealth you will have in the future!
- Open a High-Interest Savings Account and set up automatic direct deposit transfers to this account. Based on your own personal budget, you can contribute as little or as much as you want to this account! Just make sure you do it!
How to get the money to pay yourself first
Now that weâve covered how exactly you can start paying yourself first, another hurdle that a lot of people donât know how to overcome is where to get the money to pay yourself first. For most, paying yourself first means that you wonât have enough left to pay your bills and other everyday expenses.
Hereâs the thing though. Unless you have an accurate budget that shows exactly how much comes in and exactly how much goes out, you might be able to cut spending on some items.
If you make a budget and realize that youâre spending $200 a month at Starbucks or even $300 a month eating out and partying, you can lower spending on these items. Once you lower spending on unnecessary and expensive items and experiences, you might realize that you definitely earned enough to pay yourself first.
After you work through your budget and realize that you still arenât earning enough to consistently pay yourself first, then you can lower how much you pay yourself. So instead of contributing 15% of your income to your savings and retirement accounts, you can contribute even as low as 5% to be the accounts. The idea is to not only get started but to create consistency!
By Saving and pay yourself first consistently, you build the necessary skills and persistence needed to not only say for your retirement, but to build exceptional wealth!
One more thing you have in Your Arsenal is to work on increasing your income! The higher you can get your income, the more you will be able to pay yourself first. How do you increase your income you ask? By either working on getting a raise at work or earning passive income. Iâve written articles talking about just that:
Final thoughts
Paying yourself first isnât as scary and difficult as it might seem. On the contrary itâs actually pretty simple.
First and foremost, as soon as you receive a paycheck, make sure that a portion of that paycheck is put into savings and retirement accounts. The simple act of doing this first is the very definition of paying yourself first.
Secondly, donât be discouraged by trying to figure out how to get money to pay yourself first. You simply need to have a budget! This gives you a clear picture of your finances. Having a budget of shows you where you can cut expenses and have money left over to pay for everyday expenses.
If youâve already worked on a budget and still wonât have anything left over after paying yourself first, then pay yourself first with a smaller contribution and work on increasing your income. Like I mentioned, you can increase your income at work or earning passive income.
You can do this! Good luck!
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