If there’s one personal finance lesson or skill that everybody should learn as early in life as possible, it’s this one.
The skill? Paying yourself first.
What Is Paying Yourself First About?
Once you enter the Real World, expenses can start to add up. Your parents stop paying for your car insurance, if they were paying it to begin with. Any allowance you were receiving suddenly dries up. But the cell phone bill won’t pay itself. Student loan interest payments are expected to be made.
But the most important obligation is usually forgotten. That obligation is you.
Paying yourself first means that before you pay your phone bill, before you send in a student loan payment, and before you go to the movies with friends, you take part of your paycheck and set it aside to save.
Why Should I Pay Myself First?
1. It makes “you” a priority. You are the most important thing in your life. Your cell phone bill? Not so much. We typically pay for things that are valuable. If you think you are a valuable person, then you should pay yourself first.
2.You get in the habit of saving. Most people use any income they receive in the following order: bills, fun shit, savings. The problem of course is that there’s barely going to be any savings left. After bills are paid, people think “Oh, wow, I’m so responsible. Time to buy the PS3 that I deserve“. The actual order should be: savings, bills, fun shit.
3. It keeps your options open. When you set aside money for you, you build freedom. The freedom to spend a year traveling the world. The freedom to retire with an impressive nest egg. The freedom to not worry about unexpected financial emergencies.
How Do I Pay Myself First?
1. Start putting money away in an emergency fund. Start small if you must. Just add $25 every month. If you sign up for an ING Direct savings account through this page, you’ll receive $25 just for opening the account. That’s free money.
2. Open a Roth IRA. This is a killer place to invest money especially if you’re young because you probably don’t pay much, if any, in taxes. That means that the money you put in a Roth IRA will never be taxed!
3. Contribute to your company’s 401k. This option won’t be available for high school or college students, but many companies offer a 401k plan where they will match your contributions, up to a certain amount or percentage.
By paying yourself first, you setup a strong foundation from which you can make strong and sensible financial decisions.
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Not many of you had think about the phrase “how to pay yourself first”. It is important to learn to create a surplus for your future benefit from your paycheck. What go out never return again. Make a habit to cultivate it and will grow your wealth.