Paying yourself first is very common advice you may have heard from financial planners or read in personal finance books. It is common because it is one of the most important steps to being financially independent. The amazing power of this concept is often overlooked because of its simplicity. If you followed only one bit of investment advice during your life, this would be the one that would most likely make you wealthy.
Most people beginning a savings plan mistakenly try to save what is leftover each month. The problem with this approach is that after paying the bills (mortgage, car and credit card payments, groceries, etc.) there is never anything left over to save. It is human nature to spend everything we bring home. This is why it is so important that the first bill you pay each month is to yourself.
If you save a fixed amount each month, or out of each paycheck, you will be amazed at how you still have enough left over to pay your bills. This is because we subconsciously adjust our spending level to whatever we have in our account. Do you remember the last raise you received? It may have been about hundred bucks a check. After the first paycheck or two you probably felt a little richer. Then you got used to the money and were probably struggling to make it each month just as you were before the raise.
The opposite is also true. If you begin paying yourself that same hundred dollars you will get used to it and adjust your spending without even noticing it. The most effective way to do this is by having it automatically deducted from your paycheck. Begin with a small amount and have it automatically deducted from your paycheck just as your taxes are withheld. If your employer is not able to do this, which most are, have it automatically deducted from your checking account on the same days you get paid.
At this stage it is not important how much is withdrawn. It can be as little as $25 every two weeks. It is also not important where the money is deposited. It just needs to be a fixed amount that is consistently and automatically put into a separate account. Once you have this automatic saving system in place, just ignore the money. Later you can worry about better investments. Right now you are just creating new habits. In later posts I will share how to save more each month while actually increasing your take-home pay.
Chuck J. Rylant, MBA
“Fee Only Financial Planning”
Photo Credit: “17/365 Pay Day!! by Will C. as Creative Commons on Flickr.com