Picture of man with wallet in back pocket with blog title (learn how to pay yourself first and save more money)

Learn how to pay yourself first and save more money

Learn how to pay yourself first and save more money

SEPTEMBER 27, 2017     AUTHOR: SHAUN

The idea of paying yourself first is powerful because it encourages consistency. You guarantee that saving is a priority. While everyday life can throw us curveballs to manage, there’s a lot of things you can do start saving more today.


“Pay yourself first” – chances are if you’ve read any investing book, you’ve probably come across this piece of advice.  It’s one of the golden rules to building a nice nest egg.  It means that before you pay for your house, your car, or even food, make sure you set aside enough money for “Future You.”

Why is it so important to pay yourself first?

The idea of paying yourself first is powerful because it encourages consistency.  By putting aside a small sum right off the top, after every paycheck, you ensure that a piece of your hard-earned money always ends up back in your pocket.   By doing this, you guarantee that saving is a priority.  You don’t just give “Future You” the scraps and leftovers from each paycheck.

Paying yourself first can create a nice pot of money 20 years down the road.  The problem, however, is not a lot of people take full advantage of it.

Why you might ask?

Life just gets in the way – having an emergency fund would help!

Well, for one thing, everyday life happens, and sometimes we’re stretched further than we’d like: your car needs repairs, the pipes burst in your house… you get the idea.

Planning ahead of time is key to ensuring you can still meet your savings goals.  Do you have an idea of what might require repairs in the next 3-6 months?  Things like maintenance can sometimes be forecast out (brakes and tires don’t last forever!).  Plan to replace these ahead of time.

And I get it, bad things do happen for no reason sometimes.  In these cases, do you have an adequate emergency fund set aside just in case?  Planning ahead here ensures you don’t have to take money from your savings account when unexpected expenses pop up.
 

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We’re often our own worst enemy when it comes to saving

To make matters worse, we often start from a place of spending right up to, or even beyond our means.  The idea of delaying gratification isn’t appealing either, often we spend for today rather than saving for tomorrow… and we do one heck of a job rationalizing it to ourselves!  In a world where “comfort” and “me-first” consumes us, it’s hard to think otherwise.

As part of the process, it’s easy to tell ourselves that one day we’ll make it up…

When the next paycheck comes, we’ll start saving.

Just one more year and my car loan will be paid.

When the kids get older, I can put money aside.

The problem is we often chase “later” and more often than not, there’s something else waiting for us around the corner.

Personally, I wasn’t all that different.  I was blessed to have a great job right out of grad school.  After almost eight years with my head in the books, finally, I got the taste of some money!  Rather than working at saving hard, and paying myself first, I treated myself.  And why not?  After all, I’d been studying like crazy for almost eight years!  After I had bought a fast sports car and some expensive suits, I felt like a whole new man 🙂 !  This did not help my bank account but looking at the positive in all of this – at least I got it out of my system.

Now don’t get me wrong, having the luxuries isn’t bad, and splurging appropriately isn’t a problem, but everyone should know what an appropriate level of “luxury” is right for them.  Have you started saving a small amount regularly?  Do you have an emergency fund built up?  And are you taking on debt for these luxuries?  If you start good saving habits early, it becomes second nature.

SWP In Action – How you can start paying yourself first

Below are a couple of things I’ve done in the past to help ensure I consistently save money:

 1)    Automate a savings plan – Most banks have the ability to automatically move funds from your day-to-day account to a savings account.  The key here is to align the withdrawal with your pay date – you’ll never even notice it was there, and you’ll never be tempted to spend it!  Put this into a high-interest savings account, or buy investments on an ongoing basis, and you’ll not only create a cash reserve, but you’ll put your money to work!

2)    Set up deductions with your employer – Many companies provide the opportunity to deduct funds from your paycheck towards a savings account (retirement or savings).  It’s sometimes easier than moving the money yourself and since the funds will never make its way into your bank account, you’ll never be tempted to spend it.

BONUS TIP – Many employers offer a program where they match your savings from payroll deductions. It’s FREE money!  No strings attached.  Recent studies have shown however, that the majority of people don’t take full advantage of it.

Morneau Shepell, a firm that provides human resources consulting services in North America, reported about one-third of employees who are lucky enough to have access to these programs even bother to opt in.  Between the US and Canada, workers are missing out on about $27B in employer matches.  That’s big time money!  Do your research, and take your fair share.

3)    Commit 50% of your next raise to savings – If you can’t find a way to start today, plan on committing 50% of your next raise to a forced savings plan.  Why half?  If you spend a little bit, chances are you’ll curb the temptation to blow it all.  You’ll start to get on track slowly but surely… remember, consistency is the most important part!

4)    Make a plan – If you’re not in a financial position to start saving today, build a budget, and create a plan with clear milestones on how to do it in the future.  Hold yourself accountable to them.  Slowly trim back expenses you can afford to reduce (cable, cell phones and hydro are good ways to start).  You might not start saving right away, but you’ll have a clear plan and peace of mind going forward.

Related post:  The one thing people forget most when budgeting

Think it through

  • How consistent are your savings? What tends to get in the way?
  • How can you start saving 10% of your monthly pay?
  • What three monthly expenses could you trim over the next month and reallocate to savings?

Related post:  The one thing people forget most when budgeting

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