Your employer pays you and you pay your bills – with very little left for yourself. In order to build what savings you possibly can, you have to ‘pay yourself first’.For many hard-working people, the ‘savings mentality’ is to save whatever is left after spending on living expenses and fun. This system rarely works because money is going out to other people before yourself. Therefore, each month getting to the saving-part can be a challenge.
Why ‘Pay Yourself First’ Works
In 2009, a survey revealed that 61% of Americans were living paycheck to paycheck.
The solution to this predicament, as touted by personal finance gurus, is to ‘pay yourself first’. That is, you put a portion of every paycheck into a savings account and/or retirement plan before you ever get to spend it. In addition to forcing yourself to save, you’ll find that you are able to reduce discretionary spending after realizing that you have less money to do so.
Because it requires discipline to save on your own, and many lack the willpower, directing a portion of your paycheck towards savings and/or retirement before you ever get to touch the money is a way to force yourself to “pay yourself first”.
1. Contribute to an employer-sponsored retirement plan.
One of the best ways to ‘pay yourself first’ is to contribute to an employer-sponsored retirement plan such as a 401(k). When you sign up, a portion of your paycheck is rerouted to the retirement plan. Not only is it the very first way to save, your employer may match a percentage of your contribution with their own funds, which is free money. Finally, contributions can reduce your taxable income.
2. Split your direct deposit.
If you receive paychecks via direct deposit, ask your payroll or human resources department if they allow you to split it between multiple accounts. If the answer is yes, provide the required account numbers and routing numbers to split your paycheck between savings, checking, and individual retirement accounts (IRA).
3. Schedule automatic transfers to savings accounts and/or IRA.
If you cannot split your paycheck or prefer to manage the process on your own, you can set up automatic transfers. Most people have their entire paychecks directly deposited into a checking account and have money drawn out of that account. Others have their paychecks direct deposited into a savings account first.
Either way, schedule automatic transfers to the appropriate savings and retirement accounts after the paycheck hits your bank account. It’s just one more way to force yourself to save.