Have you promised yourself that you will save more money for the big things – like your kid’s college education or retirement? The problem is likely that by the time you’ve paid for everything else—the mortgage or rent, groceries, utilities, car payment, and maybe even a few dinners out—you often don’t have enough left to add to savings … at least not until your next paycheck.
If this sounds familiar, it could mean you’re NOT in the habit of “paying yourself first,” which isn’t the same as spending money on yourself. Paying yourself first means saving before you do anything else. Try and set aside a certain portion of your income the day you get paid before you spend any discretionary money. In other words, the goal of paying yourself first is to help make sure your future financial goals are covered, including building up an emergency fund, contributing to retirement, and saving for any other long-term goals.
Most people wait and only save what’s left over—that’s “paying yourself last.” But, it’s important that you change how you think about savings and here’s why:
According to a recent Bankrate survey, only about 23% of American households have an adequate emergency fund. Most financial planners recommend that you have enough emergency savings to pay for 3-6 months of fixed expenses. Bankrate reports that 26% have no emergency savings at all and the other 51% have an inadequate amount of savings to handle a financial emergency, like a job loss or serious family illness.
According to the Employee Benefit Research Institute (EBRI) only 18% of current workers have an employer sponsored pension plan that guarantees them a monthly retirement benefit. Most employers that previously offered a pension plan have done away with the pension plan, and replaced it with a 401(k) plan that relies on employees putting in the bulk of the funds.
You’d think this would be enough to scare most people into saving better. Fifty-three percent of workers in the EBRI poll say that the cost of living and day-to-day expenses are the biggest obstacles to saving.
Getting into the mind-set of paying yourself first can be the biggest challenge you face. It can be hard to transition to a pay-yourself-first mentality. Most of us are stuck in a rut and are unwilling to do something different, especially if you have been doing the same stuff for a long time. Instead of waiting for savings to feel like second nature, consider putting as much as you can on autopilot.
Depositing contributions to a retirement account before that money hits your checking account is a sure way to savings. See if your employer allows for multiple automated transfers, so you can have a set amount transferred into emergency savings or another account earmarked for a specific savings goal. If your payroll department is not able to accommodate multiple automated transfers, you can set up auto payments from your checking account to savings and investment accounts on regular paydays. The habit of “paying yourself first” takes a long time to develop. Automatic deposits is a great first step.
How much you choose to put into these accounts will depend on your budget and goals. If you don’t have a budget, sit down and take stock of what your monthly fixed costs are (bills that you can’t change from month to month – like utilities, food, house, and car payments), as well as your “discretionary” spending (personal shopping, entertainment, eating out, vacations, etc.). Go to the Western Fraternal Life website at http://www.wflains.org/financial-planning/making-budget/ for an easy-to-use budget worksheet.
If your income exceeds your expenses, this excess amount is a great starting point for “paying yourself first.” For those who think they can’t find any way to save, try looking at expenses you can reduce or eliminate, like a gym membership you haven’t used in a while. What you save by trimming in other areas can then be transferred to paying yourself first.
The sooner you get started, the better off you may be. Not only will you be able to take advantage of compound growth to help grow your money faster, but you’ll also help ensure that your financial goals are getting funded before life happens. Wait too long, and a major car repair, big medical bill, or layoff could throw your future off track.
For additional information about goal setting go to http://www.wflains.org/about-western/blog/2015/03/setting-goals-and-prioritizing/.
CFP®, FLMI, Annuity Product Manager
Call 877-935-2467 to speak with a Western Fraternal Life Representative.