Every month, you make plans to pay your rent or mortgage. You check the due date on your cell phone bill. Maybe you set up automatic payments for utilities. But are you forgetting an important payee each month? YOU!
If paydays leave little cash left over for savings, then you might consider adopting a “pay yourself first” strategy. While the concept might sound strange, this powerful technique doesn’t neglect your other bills. It forces you to make saving a priority, instead of an afterthought, by setting aside a portion of your paycheck before spending it on rent, bills, or miscellaneous purchases.
Paying yourself first can drastically increase the chances of creating a secure financial future. Pick a set dollar amount and make consistent deposits to yourself. Where should that payment to yourself go? Here are some ideas to get you started:
- Retirement accounts, e.g., 401k, Traditional IRA, or Roth IRA
- Emergency savings fund
- Unique savings goal (destination wedding, down payment on a home, etc.)
- Health savings account
It’s worth noting, if you have high-interest credit card debt, paying yourself first might also include paying extra on those cards.
Here’s how to pay yourself first and achieve your financial dreams.
Establish your savings goals
List your short-term and long-term savings goals. Prepare to have at least one of each. For example, you might have a short-term goal of saving $2,500 for a trip to Bali next summer alongside a long-term savings goal of $1 million for retirement by age 67. It’s normal to have a mix of short and long-term savings goals. Next, consider your timeline to decide how much you need to save each month to reach your goals.
Need help calculating these figures? Use these financial calculators to quickly arrive at a target amount.
Revise your budget
For each goal, add a savings category to your budget. Figure the monthly contribution amount required to reach each goal. Treat these new categories as expenses and place them at the top of your budget. If these numbers cause your budget to go in the red, then consider recalculating your goal, cutting other expenses, or increasing your monthly income.
Select a payment option
Now, it’s time to pay yourself first based on your revised budget. Choose one or more of these pay yourself first options that match your savings goals.
- Paycheck direct deposit – Speak with your employer’s human resources department about your direct deposit options. If you already have your paycheck direct deposited to your checking account, consider splitting the deposit between your checking and savings accounts. The amount deposited into the savings account should match your pay yourself first goal amount. If this is not an option, you can also look at using automatic transfers within your Online Banking. Set it up so that a certain amount gets transferred to your savings account each time you get paid.
- Manual deposits – If you’re self-employed, receive irregular payments, or your employer doesn’t offer direct deposit, you can still pay yourself first. In that case, you’ll want to choose what percentage of deposited funds you will put into your designated savings account each time. At most banks, you can split your deposit between the two accounts right when you’re making the deposit. Another great option is to use Online Banking to make the transfer to savings once your funds are available. Most importantly, be consistent. If you say you’re going to pay yourself 5%, then try your best to achieve that each time.
- Automatic deposits – Depending on your savings goal, automatic contributions can be a great fit. For example, contributing 3% of your pre-tax salary through your employer-sponsored 401(k) plan takes the guesswork out of regular deposits. In the absence of an employer-sponsored retirement plan, you can set automatic deposits directly from your checking or savings account into a Traditional IRA or Roth IRA.
When you pay yourself first, your financial goals can remain a top priority. Make your money work harder by depositing funds into an interest-bearing savings account that meets your needs. The Bank of Missouri offers a variety of savings options that make paying yourself first easy. Visit our savings account page to learn more or open an account today.