Smart-Saving: Paying Yourself First
The FIRST bill to pay each month should be to yourself.
To most, that sounds weird, unconventional, and unrealistic. If you’re just getting started in the real world or still in school, saving may seem virtually impossible. Sure, who doesn’t want to save? But saving is one of those things that’s way easier said than done, and way easier to do for the short-term, rather than the long-term. For example, it’s easier to save for a trip to Vegas than it is for your retirement account because the enjoyment comes sooner rather than later. Additionally, it’s just a lot more satisfying and fun to think about saving for short-term goals.
Trust me, I get it.
A lot of our long-term goals and needs are so far in the future, that it’s hard to see the need to start planning and saving now. It’s easy to say, “I’ll deal with it later.” But, later is not an option when thinking of your future consumption as a bill that will inevitably come time for you to pay up.
But, again, I get it.
For most young professionals and or college students, there’s just no money left at the end of the month after handling all your financial obligations and discretionary spending. For example, you may have to pay rent, a car payment, groceries, and probably student loans. On top of that, you need to have your weekend “fun money,” Netflix money, Apple Music money, or other discretionary spending money. Not to mention the abundance of ads all over our timelines, the luxury of online shopping, and new product versions releasing every year – the idea of saving and thinking about your future consumption becomes very hard to see. But, that’s the problem – most people try to save what’s left over (paying yourself last), instead of spending after you save. Now, I’m not saying to neglect your financial obligations or to not spend your hard earned money on the things that bring you the most joy – but planning for your future can’t always take the back seat. Thus, the reason why the phrase, “Pay yourself first”, is touted as one of the most important concepts in personal finance.
So, what does “Paying yourself first” actually mean?
Paying yourself first simply means setting aside a portion of your income to save before you pay your bills, before you buy groceries, before going to the mall or shopping online, or going out to happy hour. The portion doesn’t have to be substantial, but it should be something. This habit, developed early, can help you build tremendous wealth in the future, and provide you with a cushion for those all too often untimely emergencies. Imagine, for example, if you set aside just $100 a month for let’s say, 40 years. That’s $48,000 that you’ll have accumulated, without even factoring in interest rates or investment income. Now, $48,000 is not at all enough for your retirement spending, but the point is that it’s something, and can be done with a mere $100 a month. Sounds obvious and simple, right? But, the data says otherwise. According to a survey done by GoBankRate, 56% of all American adults have less than $10,000 saved up for retirement. Clearly, we are all paying ourselves last.
So, what are some ways to help you save a little more for yourself?
Well, of course, there are obvious solutions, like cutting back on going out and having fun, or picking up a second job – but those are hard and aren’t always fun. If those don’t suit you, I suggest trying the app Acorns. To quickly sum it up, Acorns saves your loose change after every purchase. For example, say you spend $5.50, Acorns will round up to the nearest dollar and will automatically save and invest $0.50 for you. Once your change accumulates over $5.00, Acorns withdrawals from your account and invests it according to your risk profile. It’s called micro-investing, and it’s been touted as a way to make investing manageable for young adults with low incomes. Personally, I use it, and I’ve really enjoyed my experience with it. It’s taken the “decision-factor” out of saving because it automatically does it for you. When it withdrawals from my account, it’s never an amount that makes a substantial impact on my account. But, the point is that it’s something, and after a while, it becomes a significant amount – just from spare change.
So, just remember that the first bill you should pay should always be to yourself. With this mindset, you’ll accumulate more wealth than when you pay yourself last.
Investopedia. (n.d.). Retrieved from http://www.investopedia.com/terms/p/payyourselffirst.asp
Kirkham, E. (n.d.). Time Magazine. Retrieved from http://time.com/money/4258451/retirement-savings-survey/
Rind, V. (n.d.). Retrieved from https://www.gobankingrates.com/savings-account/pay-yourself-first-paycheck/
Weliver, D. (n.d.). Money Under 30. Retrieved from https://www.moneyunder30.com/pay-yourself-first