We always say to “pay yourself first”. I must have included that in hundreds of lists about how to start living frugally.
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Pay yourself first is one of those classic pieces of personal finance advice. It’s worked for countless Americans to help them build wealth. But it is not always clear how it works or how you can make it work for you.
Consider the following three-part approach:
1. Set Up Account
Create a separate account from all your other accounts. This account should be dedicated to a specific goal, typically saving or investing. If possible, choose an account with a higher interest rate–like a high-interest savings account. You may not get a whole lot of cash from it, but even at current low interest rates, a couple more bucks won’t hurt.
2. Decide the Amount
Determine how much you want to put into the account and at what interval. For example, you can decide to allocate $100 per month or $50 per paycheck. This will depend on what you intend to do with the money. For example, if you want to put a $10,000 down payment on a home in 36 months (three years), you’ll have to save $278 per month.
3. Direct Deposit
Set up direct deposit from your paycheck into the account. Have an automation set up to deduct the amount you need to meet your goal from your paycheck. So, if you want to save up that $10,000, deduct $139 bucks from each paycheck – assuming, of course, that you get paid twice a month. This should be set up so it works automatically if possible. If not, set a reminder on your phone so you don’t forget. Make sure to do this right away.
The main idea here is to set up a separate process that allows you to save money without having to take any action. Pretty much, you just sit back and watch the savings add up.
The beauty of it is that paying yourself doesn’t require a whole lot of effort, and it removes the temptation to do something else with the money, like blow it on expensive coffee or eating lunch out. In fact, paying yourself first is so effective in building wealth that some people call it a “golden rule” for personal finance.
Don’t believe me? Try it and see what happens. I bet you save a pile of cash.
