What That Means and How To Do It
You can’t forget to save if you pay yourself first. According to a survey done this year, paying yourself first could help some of those people save for their goals. Paying yourself first gives you the opportunity to save your money before paying your bills or anything else. This type of budgeting causes you to prioritize saving rather than saving money that’s left over.
Here’s how paying yourself first can help if you’re struggling to save. Or if you’re just looking to save more money.
What it means to pay yourself first
Paying yourself first generally implies that your money goes directly into a savings account – this way it’s more difficult to spend those funds. I think the automated payroll deduction or direct deposit certainly symbolizes the pay yourself mentality. That’s probably not the only way it can be defined. But I think that’s the most practical way for most people. Usually a checking account should be used for spending money and paying expenses. Paying yourself first is also important because it helps prevent you from becoming complacent when it comes to saving your money. What’s more, it can also help motivate you to make a budget to save. It also saves us from ourselves – that we’re not tempted to spend or overspend and undersave. By saving first, you are putting a fence around what you can spend in a way.
3 ways to pay yourself first
One way to pay yourself first is to set up a split deposit, which is when a part of your paycheck goes into a savings account and the rest goes into a checking account. Or you could have your entire paycheck go into a high-yield savings account and then transfer what you need to pay bills and spend into your checking account. Checking accounts are meant for paying bills and other expenses. And it’s ideal only to withdraw money from the savings account for an emergency or a planned item or expense you’re saving up for. An automatic transfer from checking to savings could also achieve a similar result, if your bank offers this. This could be useful if you’re not paid via direct deposit or if your employer doesn’t offer split deposit. And the third way to pay yourself first is by contributing to your retirement plan. Contributing to a retirement plan at work means that money goes from your employer directly to your retirement account.
Use multiple bank account to max out your savings
With top savings yields outpacing inflation, you’ll want to make sure your savings is either staying ahead of inflation or at least keeping up with it. The latter is the likely long-term goal.
It’s so easy to transfer money from savings to checking at the same bank thanks to bank apps and technology. So, it’s usually better to have your checking and savings accounts at two different banks. And you should consider having that savings account at an online bank. Not only will the money be more out of sight and out of mind. Make sure you do a test transfer of a small amount, such as R50, after opening the account at an online bank. That way you’ll know how long a transfer takes in case of an emergency. And you’ll know that it should be fully set up for a withdrawal/transfer. For a savings account with an ATM card, check with your bank to see how often you need to make a withdrawal to keep your card active.
What to watch out for
There can be some downsides to paying yourself first. Here are some things to avoid:
Putting too much in your savings account and not keeping enough in your checking account. Always keep a cushion in your checking account to avoid paying overdraft fees and possibly monthly service fees. It’s possible to be too aggressive with your savings goals and then incur fees on your checking account. These fees will take away from some of your interest earnings.
Contributing more than you can afford to your retirement plan can also potentially cause you to incur fees in a checking account.
Having money saved in a noninterest bearing or low-yielding account can cause your money to lose purchasing power over time.
Saving too much and not putting at least a portion toward paying off high-interest debt, if applicable.
Paying yourself first can help set you up for savings success. Start small and realistic with your savings goals so that you’re more likely to keep your savings saved so your balance grows over time. The habit of saving and the mindset that your savings account is for accumulating money rather than spending can make a big difference in how much you’re able to save.
Adapted from: Bankrate
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