When it comes to budgeting, one of the most important concepts to have under your belt is the idea of "paying yourself first." This concept has been around since the 1950s and is the cornerstone of sound financial planning. Despite its longevity, many people still do not understand what it means or how to use it to help them reach their financial goals.
At its core, "pay yourself first" is a simple concept that can help you build up personal savings and investments. It states that as soon as you get paid, you should put some money towards savings and investments before you do anything else. This money should not be for bills or other expenses, but for yourself and your long-term financial goals.
The idea of "paying yourself first" is especially important for people living paycheck to paycheck. Without this financial principle, most people can easily fall into the habit of spending their income before thinking about any kind of savings plan. This is a dangerous trap, as living within fixed borders without any kind of savings can create a cycle of debt and financial instability that can be difficult to escape.
The key to the concept of "pay yourself first" is to ensure that you are proactively saving money, instead of responding to the demands of your bills and expenses. Every month, you should put aside a certain amount of your earnings into a separate savings account, retirement plan, or other investments for your future.
Most financial experts recommend that you should be putting 5-10 percent of your income into savings. However, you may want to start with less if you are new to budgeting, or start with more if you’re more experienced. Do whatever you’re comfortable with and stick with it.
The best way to put this principle into effect is to automate your savings. If your paycheck is deposited directly into your bank, you can set up automatic withdrawals from your checking account into a savings or investment account. This helps to ensure that you are in the habit of saving without having to constantly think about it.
If you’re starting a budget and want to put the "pay yourself first" concept into practice, there are a few important steps you should take:
-Figure out a savings goal: Before you start saving, you’ll want to figure out what your savings goals are. Are you trying to save up for an emergency fund or a down payment for a house? Perhaps you’re trying to save for retirement or a vacation. Knowing these goals will help you to set up your budget and make sure you’re allocating money towards the right thing.
-Set up a budget: In order to make the most of the "pay yourself first" concept, you need to set up an effective budget. Your budget should include both short and long-term goals, as well as allocations for your expenses, savings, and investments.
-Make saving automatic: To ensure that you're sticking to the "pay yourself first" principle, you should set up automatic transfers into your savings and investment accounts. This takes the thinking out of it, and helps to make sure you're always putting some money away.
-Review your budget: Finally, it’s important to review your budget periodically to make sure that it is still in line with your goals. As your life and financial situation changes, it may be necessary to adjust your budget accordingly.
By committing to "pay yourself first," you can ensure that you're putting money towards your future and not just spending all of your paycheck on short-term expenses. In today's world, it is essential to adopt a financial plan that takes into account both short and long-term goals. With the "pay yourself first" concept, you can set yourself up for success and make sure you are achieving your financial goals.