Paying Yourself First
How It Works

Paying Yourself First is a deliberate budgeting strategy designed to put the focus on building up your reserves of money before you address the myriad of other expenses you have to deal with.

Also called reverse budgeting, paying yourself first comes with a mindset adjustment. It should be unyielding and always prioritize you as the beneficiary, above and beyond anyone or anything else. Read on to see how it works.

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When you adopt the Paying Yourself First budget strategy, you want to start by assessing your savings goals, your long term reserves plan, and the time you estimate to accomplish this.

Most people succumb under the pressure of covering their fixed living expenses, housing, transportation, food, and the rest, understandably so. The idea here is to find the sweet spot that allows you to successfully adopt this strategy without jeopardizing your financial apparatus.

How much you can actually save per month varies per individual and situation on hand. For that reason, the most important factor in this strategy is the actual adoption of automatically setting aside a given amount each and every time you have money coming in.

Developing this habit is essential, but at the same time, cannot be depended upon because behaviors are not easy to change. You are trying something new. With all the available automation gadgets, it is best to let technology help where human behavior often fails.

Start by deciding how much you can put away each month and automate that transaction by having the transfer to your designated savings account done each month, or income period. Let the technology set it, and forget it.

From time to time, reevaluate the situation to see what dispensable expenses can be eliminated or reduced. Use that extra cash to increase the amount that you put away, thereby accelerating the pace of reaching your financial objective.

Should that amount prove substantial, it is advisable to choose a savings account or savings vehicle with appreciable interest rate to compound the growth of your savings.

Paying Yourself First Recommendations

In professional financial circles, the advice is generally to put away 20% of your income or more each month. While this is not always feasible, it is critical to remember that it’s the strategy that counts, especially over time.

You are building an emergency fund and/or an nest-egg, which will provide you with significant financial security and opportunity in the not-so-distant future.

You may start small and that is totally acceptable, because if you stick to it, this is a strategy that pays big dividends over time as your small reserves begin to look not so small. Before long, you will leave the living paycheck-to-paycheck quagmire behind. That in and of itself is a great reason to put this strategy in gear.

You may also realize that certain expenses you thought were needed may not have the same sway after a while. Membership to a gym that you attend once in a blue moon could be another added boost to your bottom line. And what about those daily lattes that cost you $100 per month inconspicuously? And so forth, and so on...

Keys To The Paying Yourself First Strategy

Switching your priorities away from the pressure of paying your clamoring bills to paying yourself first requires a hard mental shift as well as reconfiguring your expenses if necessary in order to find savings opportunities.

Clearly, when living expenses and debt payments call, the natural tendency for most people will be to cave and take care of those pressures first. Paying Yourself First budgeting is predicated upon a deliberate effort to, as the title indicates, put yourself first!

Set it and forget it is applicable here in the sense that this must not be a fund that you’ll loot at the slightest financial setback. It must continue to grow to the size that will afford you all the benefits intended. Until then, you need to continue front-loading it if you want to enjoy the fruits later.

Should I Pay Debt Or Pay Myself First?

Debt payments are often incontrovertible and non-negotiable. You are duty-bound to repay debt and also protect your credit profile. One debt payment option that you could adopt in connection with paying yourself first is to accelerate repayment by paying off your smallest account(s) first.

This is called the Snowball debt repayment method. It allows you to roll the newly saved money into the next debt. It also gives you the option to redirect some of the money saved towards your reserve account.

In doing so, you keep making your debt payments while also attending to your personal reserves. The more you pay off debt, the more funds you have to allocate to your reserve account.

A quick note on debt is that, if at all possible, you should pay it down as quickly as you can because the interest you pay on it is akin to trying to carry a bucket of water with holes in the bottom of the bucket. You won’t be able to get to your destination with much water, will you?

Credit cards are especially nefarious in that sense. Carrying credit card balances is constant leakage of your funds through the interest that you pay monthly. It is money that belongs in your reserves instead.

In closing, it is advisable to deposit your savings in an account that is not easily accessible or visible. Seeing your growing reserves and being constantly reminded that you have access to that money can make it difficult to fight the temptation to spend it.

Setting up the Paying Yourself First strategy can be done very quickly. It can even be done using a variety of apps like Digit, easily and automatically.

What should not be an option is to do nothing. This is one of the best and simplest tools towards financial stability.

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