Plenty of people struggle to pay their bills, mortgage, and all other expenses that they might have. As soon as a bill arrives they pay it. However, there might be someone you’re forgetting to pay – yourself. Funny, because you are more important than any creditor, right? Pay yourself first isn’t groundbreaking and pretty simple. So, what does pay yourself first mean?
The benefits of pay yourself first are often not getting enough attention. And that is a shame because paying yourself first is an ideal way to set yourself up for financial success. In this blog article, we describe what pay yourself first means and explain some of the benefits of doing this.
What is Pay Yourself First
Pay yourself first mean that you save money by transferring it into your bank savings account before you pay any other bills. It’s that simple!
The money that you pay yourself first is for you to be used for your financial future. You can save this money to invest and achieve your goals in life.
Why should you pay yourself first
Countless people struggle every month because they are short on money. Money often comes into the same checking account as all the expenses are paid from as well.
In such a financial setup, you can not always foresee which bills you will need to pay, and especially when. You risk spending your money on things that are unimportant, and then suddenly that expensive tax bill is in the mail that you actually forgot was coming. You are simply lacking an overview of your income and spendings, and you likely will go into debt with this setup.
With pay yourself first you get a better overview because you simply have to structure your finances. Only after structuring, you are being able to pay yourself first. It can therefore solve a lot of money issues.
With a proper financial overview, you know what you can spend your money on. Pay yourself first is one of the best pieces of financial advice we have ever gotten and it helped us a lot to structure our finances.
I am sure that you will spend less money on things that you don’t need if you do this, and you will definitely save more money.
How to pay yourself first
When I (Ronald) was a kid, I was taught by my parents that I should save a percentage from every euro/dollar that I earned. My parents taught me that saving is important as it opens up possibilities to buy more expensive things in life. Together with my parents, I went to the bank to open my first savings account. Every time I earned money, I transferred some of it to my savings account.
Growing up, I was so used to saving money that it became a habit and actually a small addiction. Every time money comes into my checking account, I directly transfer at least 50% of it to my savings account. As an entrepreneur, I don’t have any fixed monthly moments when money comes in, so I manually transfer this 50% multiple times per month. Due to this, I also automatically check my bank accounts regularly.
“Do not save what is left after spending, but spend what is left after saving.” — Warren Buffett
Saving more money: put savings first
If all your money is in your checking account it is too easy to spend it all on trips to the grocery store, impulse buys, dinners, and a lot of other things. But, if you take the money out of your everyday spending account, and put it into your savings account you can’t spend that money on other things anymore. The money just isn’t there.
You may think: ‘that’s impossible for me. I need a lot of discipline to do this.’ Actually, it’s not. It becomes easy to spend only the money in your checking account. Once you have the system in place, it will help you to prevent overspending and make it effortless. The main reason for this is that you don’t see the surplus of money. It’s tucked away safely in your savings account.
Pay yourself first is very easy to set up. It will probably only take you around 20 minutes. We recommend configuring an automatic direct transfer into your online savings account after the money is deposited into your checking account (payday). Most banks nowadays have online possibilities to do this.
The remaining money in your checking account is what you use for paying your bills and your everyday spending. By doing this you become more frugal and consistently save money. Because you simply put savings first.
Nowadays we actually go a step further. We still pay ourselves first but our bank account structure is improved with several checking and online savings accounts, which all have different purposes. Please read our blog article set up your bank accounts for financial success where we explain our current setup if you want to learn more about this.
How much do you pay yourself first?
The amount of money that you pay yourself first is very personal, and of course, depends on your spending habits and any financial obligations and liabilities that you might have.
When you want to start with paying yourself first and have no idea of how much money you should transfer to your savings account, we suggest starting small. Start with an amount you think you won’t need to spend directly and increase this savings amount each month.
Once you see your savings account grow it becomes addictive and you want to save even more. The more you save, the more you will want to save!
By increasing your monthly savings amount you won’t notice the difference in your spending pattern that much. If you really want to go ‘all-in’ you can lower your expenses as well.
Our blog on how much should I have in savings may give you some ideas of what you can save for.
Plenty of people struggle with their finances because they don’t have control over it. Money comes in and goes out of the same checking account. Pay yourself first simply means that you set aside money before you do anything else with it. It gives you control and a better overview of your financial situation.
Pay yourself first is a very powerful way to save money automatically, and it helps you to spend less as well.
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