When it comes to saving money, you’ve probably heard people say, “Pay yourself first.” What does the “pay-yourself-first” model look like, and is it the right choice for you?
Employing this approach can help you manage your personal finances while putting a greater emphasis on savings. Here are a few points to keep in mind.
What Does It Mean to Pay Yourself First?
When you budget, you plan how you’re going to spend your monthly income. Paying yourself first means knowing how much you need to cover your bills, then finding a comfortable amount to put in your savings share each month. Once you’ve determined that amount, you make that “payment” into your savings account as soon as you receive your paycheck.
The amount you save shouldn’t compromise your ability to manage your necessary monthly expenses. It’s also helpful to set up automatic transfers for your set savings amount each pay period so that you don’t have the opportunity to spend it.
Regardless of your financial situation, when you pay yourself first, you’re contributing to your future. You can change your savings plan to fit your unique needs, too, whether that’s adding to your emergency fund, putting money into a retirement account, or paying down personal debt.
Budgeting and Saving for Long-Term Goals
Paying yourself first enables you to plan for the future, leveraging your savings to achieve long-term goals. To do so, you may have to adjust your budget and the amount you save each month, especially if you have an irregular income. But never compromise on making that contribution toward your savings account, even if you can only afford to put away a few dollars.
Having savings goals can be a strong incentive if you’re working toward something fun, like a luxury that would typically fall outside your budget. Your goals can also be more practical if you’d rather spend your savings on a functional item. Here are a few ideas.
- Vacation: Set aside a certain amount each month and use the money to finance a special trip.
- New appliances or furniture: Making a large purchase can make less of an impact when you work up to it. For instance, if you save for six months, you might have enough to buy a more expensive item outright.
- Holiday gifts: If your budget suffers in November and December, consider putting money away throughout the year to afford presents for everyone on your list.
The Benefits of a Pay-Yourself-First Model
Paying yourself first has many benefits.
- It eliminates the temptation to skip a contribution to your savings during financially lean months.
- It encourages you to save rather than spend on things you may want in the moment but later regret purchasing.
- It builds your savings so you have money to rely on if you suddenly face difficult financial circumstances.
- It reduces stress because you know you have the means to take care of yourself if you lose your job or face another money-related issue.
Common Misconceptions About Paying Yourself First
There are many common misconceptions about paying yourself first.
- Only wealthy people can afford to pay themselves first: If you’re creative, you may be surprised at the wiggle room you can find in your budget. It’s not always as simple as eliminating a daily cup of coffee – you may need to do additional research into things like refinancing a car loan or transferring high-interest credit card debt to a lower-interest card to have enough cash to set extra aside each month.
- I can’t continue paying off my debt: Paying yourself first doesn’t mean you stop paying off your debt. By putting more money toward debt reduction, you protect your future. You can increase the amount you put in savings after your debt is gone.
- I have to eliminate discretionary spending: With a pay-yourself-first model, you may think you no longer have money to spend on gifts, going out to eat, or entertainment. While your discretionary spending may dip, it’s important to reframe your thinking. Rather than focusing on what you’re giving up, look ahead to what you’re gaining – progress toward financial stability. Plus, choosing your splurges carefully can help you appreciate them more.
Members Achieve More at PSECU
At PSECU, members take priority. Member-owned digital banking offers a convenient, refreshing way to manage your finances. At PSECU, our Members Achieve More. Our digital banking tools allow you to manage your savings on the go, and our educational resources help you make your wallet work for you. To enjoy these benefits and more, become a member today.
For additional tips on saving and money management, visit our WalletWorks page.