Save More When You Pay Yourself First

When you sit down to pay your bills each month, who do you pay first?

Your rent or mortgage? Because you have to have a roof over your head…

Grocery bills? You have to eat…

Your car payment? Because you have to get to work…

Childcare? You can’t go to work without someone to watch the kids…

Or maybe it’s your insurance bill… your power bill… your water bill, your cell phone bill… or your credit card bill…

But not ONE of these is as important as the bill you probably NEVER pay.

The one you owe to YOURSELF!

Yes. You have to pay all your bills, but we also believe you should consider an investment in your future as a “bill”.

Your most important bill, as a matter of fact. The one you pay first – before everything else.

Experts recommend we put 5% to 10% of our take-home pay into savings for our future. So if you make $550 a week, that’s $27.50 – $55 a week.

Where should this money go?

…into a separate account not linked to your everyday checking account. You don’t want to be able to dip into this money easily to cover additional expenses or for overdraft protection. This might be a retirement account (like an IRA), a money market investment account, or high yield savings account. It’s best if it is at a completely different bank than your main checking.

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This pay yourself first account must be also separate from your emergency fund.

An emergency fund is exactly what it sounds like – a source of funds for an emergency. Ideally, you should be able to cover three complete months of living expenses without affecting your regular budget or using credit.

If you have no emergency fund yet, dedicate all the savings you can into your emergency fund until you have one month of expenses saved up.

Then split the amount you can save each month and put half in your emergency fund and a half in your pay yourself first account. Once you have three months of expenses saved up in your emergency fund, take everything you can save and put it into your pay yourself first account.

This plan gets a little tricky if you don’t have an existing checking and savings account. One of the easiest ways to get up and running is with an online savings account, which typically offer better interest rates anyway.

If you’ve been turned down for a checking or savings account, it’s likely not because of your FICO credit score. Banking institutions have their own report called ChexSystems. It tracks bounced checks, overdraft fees, and other related information about your banking habits. You can request a copy of your ChexSystems report here. If you find negative information, do everything you can to contact the reporting bank and clear it up. Then ask them to remove their ChexSystems claim against you.  If you find errors or don’t recognize some of the accounts on your ChexSystems report, you can read this article to find out how to contact them to report the errors.

Now you may be thinking, “No way! I already barely make ends meet.”

Well… you have two options then. You either need to earn more… Or spend less.

Maybe you could get a part time job on the side or sell some things on eBay. Look through your monthly spending and see if there are any luxuries or discretionary spending you can cut out. Do you really need that fancy coffee every day? Can you bring your lunch to work instead of buying? One less trips to the salon or your favorite restaurant can make a huge difference in just a short while.

The truth is… you have to WANT to make this work for it to work.

But it’s okay to start slow. Even if you just start with $1 or $2 a week, you will be developing the habit of saving. As your income increases and you learn to decrease your expenses, you can put more and more of your income into your “pay yourself first” account.

Here are a few tips to make it as easy as possible to pay yourself first.

  • Have a portion of your pay direct deposited into your “pay yourself first” account. All you have to do is talk to the person who handles payroll at your job and you can adjust your direct deposit amounts.
  • If your pay is not direct deposited, you can set up an automatic transfer from your checking account into your “pay yourself first” account scheduled for each payday. (Just make sure transfers are not easy the other way around. Make it as hard as you can for you to move money out of your “pay yourself first” account.
  • Have a specific goal in mind. Being as specific as possible makes the goal more of a reality. For example, you might plan on saving a total of $10,000 over a period of 3 years. For more information about setting goals, take a look at this.

One very important final note… if you are relying on credit cards at the end of the month in order to be able to afford to pay yourself first, you’re missing the point. It makes no sense at all to go into debt to put money into savings. It’s a net result of zero. (Or less than zero if you carry balances over and pay interest.)

As soon as you notice this is happening… STOP! Reevaluate your budget and see where you can make changes.  Remember… earn more and spend less. That’s the key to the whole thing.

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This information is intended for informational and educational purposes only and not as legal advice. If you have concerns about your credit report, harassment, identity theft, illegal collections activity, garnishments, or property liens, you should consult an attorney who specializes in consumer rights and defense.

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