Pay Yourself First
There are a lot of people who are living from paycheck to paycheck, and have nothing to show for it. They spend everything they have, and do not save a penny. I know that there are some of you who will say, “I do not make much, so it’s really hard for me to save.” The first part can be true, but the last part is simply because you are not disciplined in saving money. You do not know how to pay yourself first.
As a side note… I am a Christian, and because of that, I will always take out 20% of every paycheck right away: first, to give back to God, and secondly, to pay myself. In this way, you may think that I am not paying myself first, but I truly believe that every paycheck that comes in is a gift from God, since He is the reason I am where I am. Therefore, this is His money, and I’m just managing it. After I give Him back the amount He asks, I pay myself first before anyone else. There are a lot of explanations for this, if you’re an non-believer and do not understand. I heard this message yesterday from Pastor Chris Hodges from Church of the Highlands, and thought it was great.
Although I believe true comfort comes from God, I also believe that He equips us with the intelligence to make smart choices now that will help us in our future, and I believe that setting aside a healthy portion of money for a rainy day should be common sense to anyone. Surprisingly, hardly anyone does it when they’re young, which is a terrible waste.
So how do you pay yourself first? Simple: save 10% of every paycheck you bring in. Set up a savings account (preferably a money-market savings account from a great company), and make sure that every paycheck that goes in has 10% of it going straight into that account. Every time. What? That’s it? Yes, that’s it.
Believe me, for a generation in which the majority of parents did not instill great financial discipline, that is a great start. What this does is teach you to be somewhat financially responsible in an automatic fashion. You get a check, and without thinking about it you put a portion of it into savings. You get another check, and again, without thinking, you put the same portion of the new check into savings. Keep doing this. Whether you realize it or not, you are paying yourself first this way.
Eventually, you’ll have a nice little savings account started, which can really help when you need it. Here’s the other key: DO NOT SPEND IT. Do not spend it on needless things! This money is for emergencies only! This is not the money you will use for a great vacation to the beach.
Well, if that’s the case, where do you get the money for the nice vacation you’ve been planning? Pay yourself another 10% into a different savings account, and label that one your vacation fund! But now we’re getting into budgets, and that’s not what this post is ultimately about.
Too little… too much…
Some people think that it’s too hard to save that much, and surely there are some good cases for saying that. If you’re living in poverty, and you hardly can pay all of your bills, then maybe you don’t save 10%, but 5%. Just save something. You’re trying to learn good financial habits from this.
Other people are making a ton of money, and could probably save more than 10%. Most of the time, this doesn’t become feasible until they decide to start living on a written budget, and they suddenly realize how much money they truly make. They realize that they do not need all of the money they make every month to make it through every month, and they could truly save a good bit of money. If this is you, go ahead and save that money!
A good lifetime habit
This is a good habit to form for your whole life. Why? Because chances are, your income will go up. If you’re smart enough to concern yourself with saving 10% of your money, you’re probably going to be making steps throughout your lifetime to make your income go up. That, and most of the time, people earn more later in life than they do when they are younger.
Because your income will go up, your percentage saved will go up as well. If you start out of college making $10/hr, then $1 of every hour worked (after taxes) will go into a savings account using this method. Fast forward some years, and suddenly you’re making $2.5/hr will go into your savings account (again, after taxes), That’s going from $40/week in savings to $100/week in savings (once again… after taxes). Building this habit when you make little will seem to be a lot easier than building this habit when you make a lot.
The same is true even if your income goes down. You can still save 10%. Do not think you get off easy because you got demoted or less hours. On the contrary, you should be saving as much as possible, since you are not making less! Do your best to get that income back up, but don’t forget to save what you’re making along the way!
Saving money is something that anyone can do to some degree, and something that everyone should do to some degree. Without saving money, you are setting yourself up for a financial disaster when trouble comes along, and you will probably borrow money somehow to pay for it, which will only cause your financial life to spiral even more out of control. Don’t borrow money to pay for emergencies. Use the money you’ve saved thanks to building a great lifetime habit earlier in life.