Are You Paying Yourself First? The Money Habit That Can Boost Wealth
You may always say that you’ll up your retirement contributions (next pay period, you promise!) or stash a little extra in your emergency fund, but somehow another month passes and you still haven’t done it.
The problem is likely that by the time you’ve paid for everything else—rent, groceries, utilities and maybe even a few dinners out—you often don’t have enough left to add to savings … at least not until your next paycheck. And so the cycle goes.
If this sounds familiar, it could mean you’re not in the habit of paying yourself first, which isn’t the same as spending money on yourself. “Paying yourself first means saving before you do anything else,” says David Blaylock, CFP® with LearnVest Planning Services. “Try and set aside a certain portion of your income the day you get paid before you spend any discretionary money. Most people wait and only save what’s left over—that’s paying yourself last.”
In other words, the goal of paying yourself first is to help make sure your future self’s key financial goals are covered, including building up an emergency fund, contributing to retirement and saving for any other long-term goals, like a down payment on a new home. Bottom line: It’s important to have these bases covered before you spend any portion of your paycheck on, say, a happy hour with friends.
Of course, this means you need to get into the mind-set of paying yourself first—and that can be a challenge for even the most money-savvy among us.
Why It’s Important to Pay Yourself First—Now
[Paying yourself first] is a tactic that’s been talked about and promoted for a long time, but the country’s savings rate doesn’t indicate enough people are doing it,” says Chad Nehring, a CFP® and partner with Conceptual Financial Advisors in Wisconsin.
According to a recent Bankrate survey, only 23% of Americans have enough emergency savings to cover six months of expenses (the amount many advisers recommend for financial security should something unforeseen happen)—and 26% have no emergency savings at all.
Meanwhile, another poll by the Employee Benefit Research Institute shows only 18% of workers are very confident they’ll have enough money saved for retirement. Combine that with the pending Social Security shortfall and the fact that very few employers outside of the government offer pensions anymore, and the take-away is clear: Your nest egg is your responsibility.
You’d think this would be enough to scare most people into saving better, except there’s the little matter of, well, just about everything else your paycheck has to cover: 53% of workers in the EBRI poll say that the cost of living and day-to-day expenses are the biggest obstacles to saving.
But the sooner you get started, the better off you may be. Not only will you be able to take advantage of compound growth to help grow your money faster, but you’ll also help ensure that your financial goals are getting funded before life happens. Wait too long, and a major car repair, big medical bill or layoff could throw your future goals off track.
“Bills shouldn’t be a surprise, but there are going to be things you can’t control,” Nehring says, adding that he and his wife are constantly dipping into their own emergency savings because of the unexpected. “Having [that] money available prevents panic.”
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