You’ve probably heard of the popular phrase “pay yourself first”. I’m not sure where the term actually started, but it was made popular in a book called The Richest Man in Babylon. The basic concept of paying yourself first is recommended by numerous personal finance gurus and is a very simple technique to learn. Here is more about this financial rule and how you can use it to save money. In fact, you may already be doing it.
How to Pay Yourself First
The concept is really easy. Most people fail to save any money each paycheck because they use their check to pay bills and for all other spending. By paying yourself first, you automatically have a percentage of your paycheck deposited into a savings account. By doing this, the money will go right to savings and you can pretend in your mind that the remaining amount of your paycheck is all that you have to spend for that period.
You may already be doing this if you are contributing to a 401k or other retirement plan at work. The same could be said about your social security withholdings, even though they are not voluntary, they are still payments made to your retirement account. Even if you are contributing to a plan at work, you should still try to do this at home. But how much?
How much should you pay yourself?
That depends on how close to retirement you are. If you are 50 years from retirement, then 10-15% would probably be substantial. However, if you are only 20 years from retirement or less, that percent would have to go up dramatically. To find out how much you need to save each month to be able to retire, you can run some numbers in a spreadsheet and then back into the percent you’ll need to save each month.
You may argue that you can’t afford to save that much money because you can’t pay all of your bills. Ask yourself, what if your employer cut your hours by 10%? Or what if you lost your job and could only find a job that paid 20% less? How would you live then? That’s the attitude you need to take in order to make this work. Saving money is hard and you may need to make sacrifices, but if you do, it will be worth it. It’s not that hard. Here are my favorite ways to save money.
What Others Have to Say About Paying Yourself First
This is the part where we visit some other sites to see what they have to say. I have to say, I found one site that tried to debunk this as a myth. I’m not going to post an excerpt because I believe his math was way off. I did find a good description of why this system works from Starion Financial. Granted, they are selling their own banking system, but this quote is right on with respect to why this system works:
Before you pay rent or your utility bill, before you buy groceries, and long before you pay for dinner and a movie, the first bill you should pay is to your own savings or retirement account.
When you save a little money at the beginning, it won’t be there for you to spend at the end. It’s a little mind trick that makes saving less daunting. Save from the top of the pile; not the bottom.
If possible, make this payment to yourself automatic. Out of sight means out of mind. You won’t even realize you’re saving money.
There are lots of other opinions out there about paying yourself first, but most everyone agrees that this is something that works quite well for those that have the ability to stick with it.
Do you have any thoughts on this subject?