Whether you are one of the people that are taking actions to create financial stability or not, there is a habit that everyone can benefit from—paying yourself first. It’s common for people to pay for their expenses (fixed, variable and living), and put into savings what’s leftover, which is paying yourself last.
The idea of paying yourself first is to take money you receive from paychecks, gifts, selling items, etc., and immediately putting a portion of that into a savings account and working with what’s left to cover your expenses. Moving that savings transaction to the front of the line ensures that the maximum amount to save is achieved each month, and reduces your chances to spend those funds on frivolous items that aren’t really necessary.
Now, we’re not looking to downplay the importance of taking care of your expenses, as that is still very important, but taking care of your own financial health is the first step to take in reducing or preventing those expenses you have each month. Paying yourself first is an excellent way to help you achieve that freedom.
How much you decide to save is different with each person or couple. Sitting down and creating a budget is a great way to determine the amount that you can tuck away BankRate.com has a great one to use
Plug in your monthly income, monthly expenses, and look to see what you project to have available for savings. Build into your budget some flexibility for planning for items that may not be needed monthly (house maintenance, auto maintenance, etc) but would be nice to have reserves set up in the event a large bill is incurred. It’s also good to give yourself and allowance for some fun items. This can often be a very fluid exercise, evaluating your projected budget for the month and how things went for the previous month, adjusting items to the appropriate levels or trying to reduce expenses that seem high.
There are a couple different ways to get yourself into the habit of paying yourself first, but the easiest way to do so is to make it automated. Many employers are able to put a certain amount of each paycheck directly into a savings account for you. This “out of sight, out of mind” method makes the transition to paying yourself first much easier to accomplish.
If your employer does not offer that feature, or you prefer managing the transfers yourself, we at the First National Bank of Osakis can help you get into the habit of paying yourself first. Our online banking website has features that allow you to customize your savings contributions, transferring funds to the appropriate accounts (checking, savings), and do so automatically.
You may also find it useful to have your paycheck direct deposited into a main savings account, only to transfer out the funds necessary to a checking account to pay your bills, appropriate to specific savings accounts (such as Health Savings Accounts), and put away for retirement (Individual Retirement Accounts). This will protect your main account from fraud, as you won’t have a debit card attached to it, and allows what remains in the account to be paid interest and be your growing emergency fund.
If you’re curious what paying yourself first will do for your account, our section of financial tools has a savings calculator to help you calculate the future value of your savings routine.
Implementing this habit can help your future self reach the financial goals you’re striving for now, whether it’s to establish an emergency fund, take an island vacation or have a down payment available for a home. Right now is the right time to start this habit, whether it’s setting up a budget (and sticking to it!) to determine what you can save or talking with your employer to setup the next check to have money set aside for you so you don’t have to. Paying yourself first puts you in a higher chance of making that topic of money become one that can be fruitful and exciting, instead of tense and stressful.