Paying Yourself First – The Key to Saving Money

Written by , December 16, 2011

Paying Yourself First – The Key to Saving MoneyThere are many different ways to build your savings and secure your financial future. Reducing your highest interest debt before paying down other debt, setting and sticking to a budget and reducing unnecessary costs are all important pieces of meeting your financial goals.

One concept that isn’t quite as well known, but which is very effective (as well as being very easy) is the idea of “paying yourself first.” The basic idea is to characterize your savings or investment plan as a “bill” that needs to be paid just like any other.

Below is banking advice you can use to get into the habit of paying yourself first and saving money.

  • Direct Deposit. The best way to establish this habit is to use direct deposit. With direct deposit, your employer doesn’t give you a check at the end of each pay period. Instead, your salary or wages are transferred directly into the account or accounts that you select. A common “pay yourself” technique is to have most of your paycheck deposited into your checking account, and the remaining amount into your savings or investment account. When your money goes directly into savings, and never touches your checking account (where you’ll have easier access to it), it’s easier to stick to your savings goals.
  • Deposit Your Check and Immediately Transfer Funds. If your employer does not offer direct deposit, then you’ll need to get into the habit of making the transfer into savings yourself. Rather than simply deposit your entire paycheck into your checking account, allocate a portion to go directly into your savings. Determine what fixed amount should go into savings each month, and stick to this savings budget. If the money isn’t in your checking account in the first place, then you can’t be tempted to spend it on things that aren’t part of your budget.
  • Use Your 401(k). Another level of “paying yourself first” can be accomplished with respect to your retirement savings. If your employer offers a 401(k) or similar retirement program, you can set up automatic paycheck deductions to contribute directly to your retirement account. Rather than plan on making your retirement funding decisions at the end of the year “if you have money available,” it’s better to do that funding each and every time you have money available (i.e., each time you get paid). Try to get your retirement savings and your regular savings incorporated into a pay yourself first plan.
  • Avoid Cash. The reason that paying yourself first tends to work so well is that it eliminates the temptation to spend whatever money is available to you. For this reason, it’s important to try to avoid conducting your financial affairs in cash. If you are currently in the habit of cashing your paycheck, you might find that you’re out of money (and haven’t saved anything) by the time you next get paid. Get a checking and savings accounts set up immediately to avoid this situation.
  • Once you get set up in a routine of paying yourself first, you won’t need to do anything more. You’ll simply base your budget on the amounts you have in your checking account, while your savings and retirement accounts grow automatically.

    Tags: , ,

    • Twitter
    • Facebook
    • Digg
    • Delicious
    • Reddit
    • Stumble
    • Design Float
    • LinkedIn
    • MySpace
    Subscribe   Share/Bookmark