Many of us go through life, paycheck to paycheck, promising ourselves that we’ll start saving for emergencies or retirement. The only problem is there are usually more expenses than money. If you want to have money in your savings account, you have to start paying yourself first. This means setting aside a percentage of your paycheck each pay period before anything else gets paid. In some cases, the money can be taken out before your paycheck even arrives. The following are just a few reasons why paying yourself first is an important part of finance.
Paying Yourself First Ensures You Save
How many times have you said, “This week I’m going to put whatever I have left from my paycheck into a savings account.” How many times have you actually had money left? See. That’s the problem. Most people spend their money and have nothing left to save. Even deciding to save 5% of your paycheck is a great place to start. For example, you could put 5% into a 401k account and never see or miss that money.
It Gives You Money for Emergencies
Paying yourself first allows you to build an account for emergency situations. If you’re the type that wants to get out of debt, one of the best things you can do is start building an emergency account. This will allow you to rely less on credit and finally get out of debt. If you’re in deep debt, it can be hard to put much money towards the account, but every little bit helps.
You Can Save Up for Big Purchases
Another way paying yourself first can help you get out of debt is by allowing you to save for big purchases. For example, instead of putting that new TV on your credit card, consider how much you need to save each week to buy the TV within 6 months. If the TV costs $1500, you would need to put back around $65 per week. It may take longer to get gratification, but you won’t have to worry about paying interest.
You’ll Pay Less on Taxes
If you pay yourself first by putting money into a tax-deferred retirement plan, you’ll have less taxes to pay. This can be very beneficial to those who are self-employed. If you work for a company that offers a 401k, also consider using an IRA as well.
The Money Is Harder to Spend
When money goes into a retirement plan or savings account that has balance requirements or withdrawal fees, you’re more apt to leave the money in the account and not spend it. Your best bet is to have part of your paycheck sent directly to your savings and retirement accounts. If you don’t see the money, you’re less likely to miss it.
Don’t wait until the end of the week to put money into your account. Make it a habit to pay yourself first. Soon you’ll have a healthy savings account and be well on your way to a stress-free retirement.
About the Author: Agripina Mould spends a lot of time studying her finances and has made it her goal to put money into her savings, IRA, and penny stocks brokerage accounts each month.