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Finances & Money

Ways to Save Money #5: Pay Yourself First

February 5, 2008
By Clever Dude
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Continuing with my Ways to Save Money Series, based on the Save to Quit eBook, I’d like to introduce an idea that many of you will find surprising: Paying Yourself First. If you follow the personal-finance world, you probably heard of this already, but if you haven’t let me lay it out for you quickly and simply.

Paying yourself first basically means you contribute to your savings or retirement accounts immediately, even automatically, before you can spend that money. Some of you have the discipline to do the money transfer on your own each month, but for the majority of us, including myself, we need to take extra steps to ensure we contribute to our savings and retirement accounts.

So how can we save money by paying ourselves first?

  1. First you need to have a budget
  2. Then, in that budget, set aside a reasonable amount of income aside for savings and retirement each month. David Bach (gasp, I’m quoting a “guru”!) recommends budgeting 1 hour’s worth of work per day, or about 12.5% of your gross income towards savings. So, if you make $2000 per month, that’s $250 for savings.
  3. Next, depending on your banking method, you need to set up automatic transfers to your savings and brokerage accounts. In our situation, we could set up automatic transfers from our Bank of America checking account to our ING Direct Orange Savings account or to our eTrade brokerage account. It’s a “set it and forget it” deal, but you need to make sure you transfer the money out shortly after payday. Some employers even allow you to direct deposit your paycheck into multiple accounts. You can’t get much closer to the income stream than that!
  4. Lastly, every few months, review your contributions and revise (upwards hopefully) as-needed.

The idea here is that you won’t spend the money if you don’t have it. Sure, you’re just putting it into a less liquid account (savings, stocks, etc.), but “out of sight, out of mind” right? Uncle Sam pays himself first by taking out your taxes and you never consider that “your money”, do you? You know it’s coming out each month before you get the check, and this “Pay yourself first” business is the same logic. Pay yourself first before you pay anyone else and you’ll see your savings and investments grow every month while still maintaining your normal lifestyle.

See the rest of the Ways to Save Money Series here.

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Comments

  1. Fiscal Musings says

    February 5, 2008 at 8:44 am

    A very simple concept, yet so many fail to do it. That’s probably why it’s still talked about so frequently.

    Reply

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