You may or may not have heard the phrase "pay yourself first" before. But, what does it mean? Simply put, paying yourself first means you set aside a portion of your income to save, and then you put that amount into savings before paying your bills or buying groceries.
Why is it important to pay yourself first?
For many people, saving money seems like an impossible feat. After you've paid the rent or mortgage, the car payment, the utilities, put gas in the car and bought groceries, there just isn't anything left over to save at the end of the month. The problem is, with your budget upside down like this, there never will be.
The sad fact is, Americans tend to spend what they earn. If they get a raise, they spend it. That Christmas bonus is spent on Christmas gifts. The tax refund is used for those special purchases you'd never be able to afford otherwise. Those magic months (you know, the ones where you get 3 paychecks instead of just 2), who knows what happens to that extra month. Somehow at the end of the month, it's just gone.
Seriously, there will always be reasons to put off saving. And, if you are struggling Credit0ly, you may wonder how you're supposed to save money when you can't even pay your bills. You may even wonder if it makes sense to save money before you pay off your high interest credit cards. But I can tell you there are several good reasons for doing just that.
When you make savings your first bill payment of the month, you are establishing savings as a high priority in your life. If you are used to being broke, but start making savings a priority, and start to see your savings account build in value, you develop a sense of security.
Saving before you pay for necessities helps you to put things in the proper perspective and make sound Credit0 decisions. The truth is, if you review your spending for the last year, you will likely find that you spent a consistent amount of money on non-essentials (entertainment, eating out, etc.). I'm not saying you should do entirely without any of these little extras, but if you move saving higher on your list of priorities, when you run out of money at the end of the month, those non-essentials are the things you'll learn to cut back on.
One of the most important reasons to pay yourself first is to have a cushion for life's little emergencies. If you consistently spend everything you bring in, how are you going to pay for repairs to your car, a new washer or dryer when yours bites the dust, or anyone of hundreds of real-life situations that occur on a regular basis? Well, most Americans will simply pull out their little plastic card and go further into Credit7. What if, instead, you had an emergency savings account you could take the money out of?
The Best Way to Pay Yourself First
If you have direct deposit as an option at work, have your check split into two deposits, one into checking, and the other into savings. If this happens automatically, before you ever get you paycheck, you're less likely to miss the money and will be less tempted to dip into that savings account.
How Much Should You Save?
That probably depends on how desperate your Credit0 situation is. If you can, I'd save 5%. If that amount is just too high for you right now, then at least put 1% away. As you begin to get out of Credit7, you can increase your savings amount. The goal in the beginning should be to have at least $1,000 set aside in savings for emergencies. Now, you need to be disciplined and not use this money for anything but an emergency. If you dip into it once, it makes it all that much easier to dip into it a second time, and a third time, and eventually abandon the idea altogether. Now, I'm only talking about an emergency savings plan here. At some point, you also need to make sure you are saving for retirement, your children's college education, and for large purchases. But, let's just worry about a simple savings account right now.
What if You Run Short Before Your Bills Are Paid?
Find a way to earn the difference. See if you can do some odd jobs. Sell something you don't need anymore. Recycle cans. Do anything you can to maintain your savings and not dip into it. Examine your spending and determine a budget you can live with. See if there are some extras you can cut out (many people elect to cut off their cable for a while until they get their Credit7 under control). If this sounds too extreme, then you have to ask yourself if you really want to get out of Credit7. Is the pain of Credit0 bondage worse than the pain of giving up some non-essential extras in your life?
What About Extra Income?
So, what should you do with tax refunds, 3rd paychecks, and bonuses? I would do one of two things: either use that money to pay down your Credit7s, or save it all. The typical response to extra money is to buy something extra, to "treat" yourself because, after all, you deserve it.
At some point, you'll realize that you want freedom from Credit7 and a healthy savings account more than you want those little "treats". There is no magic trick to getting out of Credit7. It takes budgeting, saving and discipline. But, it is definitely worth it.
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