How to pay yourself first

A key element of personal finance is remembering to pay yourself first.

When you pay yourself first, you are giving money to yourself before any other spending, prioritizing your long-term financial well-being.

What is pay yourself first?

The pay yourself first method is a reverse budgeting strategy that suggests you save a portion of money before spending any other money on bills and other items. The amount saved is usually predetermined as part of a long-term goal, and is often placed into a retirement fund, savings account, or emergency fund.

Rather than focusing on immediate needs such as bills, you are prioritizing your funds by saving before spending. As part of the pay yourself first method, consider having the funds automatically redirected into your chosen account. For example, if you want to put $100 of every paycheck toward your health savings account, you could set up an automatic contribution instead of manually transferring it yourself.

The best benefit to paying yourself first is building the amount of money you’ve saved over time. It gives you the opportunity to save up for bigger purchases such as a house, or even long-term goals like retirement. Your contributions will continue to grow over time with compound interest.

Before you consider paying yourself, remember that the strategy may not work for everyone. Look at drawbacks before finding the best fit for paying yourself first. For instance, while saving can help boost your savings account, your priority may be on paying down debt like credit card or student loans. Even poor money management can hinder saving money.

How to pay yourself first

If you’re ready to start paying yourself first, consider this strategy:

  1. Assess your expenses and spending: Review your fixed and variable expenses. Fixed expenses may stay consistent each month such as a car payment. Variable expenses may vary from month to month and include costs such as vehicle maintenance and groceries.
  2. Identify your savings goals: Once you assess your income and expenses, consider a savings goal and where you would like to put the money you save. If you’re unsure of how to start, try the 50/30/20 rule. The breakdown is:
    • 50%: Essential expenses such as housing, food, utilities, and debt payments.
    • 30%: Wants and lifestyle expenses. This includes any savings goals such as travel, wedding, or a new car.
    • 20%: Savings and any extra debt payments. This includes emergency funds and retirement accounts.

For example, your monthly income is $3,400. You would reserve $680 for savings and debt repayment, $1,700 for needs, and $1,020 for wants or needs.

3. Review and reevaluate: Keep in mind that your budget never remains the same. As your life changes, so does your finances. To keep your budget up to date, review it on a regular basis and make changes as they arise.

Other savings strategies

Some other strategies that can help you save your money include:

  • Direct deposit: Have your employer split your direct deposit so that a percentage goes into your savings account.
  • Automatic transfer: Each payday, regularly schedule a specific amount of money to transfer from checking to savings.
  • Set up a savings account: Adirondack Bank offers a variety of savings accounts to suit your needs from Hometown Savings to Holiday Club. Visit adkbank.com or your local branch for full details.

The information is this article was obtained from various sources not associated with Adirondack Bank. While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. Adirondack Bank is not responsible for, and does not endorse or approve, either implicitly or explicitly, the information provided or the content of any third-party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. Adirondack Bank makes no guarantees of results from use of this information.

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