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What Does it Mean to Pay Yourself First?

If you've heard the phrase "pay yourself first" but don't know what it means or how to put it into practice, you've come to the right place.

Simple behaviours like this can have a significant financial impact. But first, let's talk about what it means to pay yourself first.

What does it mean?

Simply, paying yourself first is when you set aside money for your financial goals before you spend money. Most people are accustomed to paying for needs, spending on wants, and only then saving money. But what if you started to pay yourself first, even before you paid your bills? One of the easiest ways to do this is to have money automatically go into an account that’s separate from the account you use to pay your bills. When you pay yourself first, you are prioritizing saving or investing for your future self before you spend money.

Why is it Important to Pay yourself First?

Making your financial objectives a priority assists you to develop and maintain healthy financial habits. It's all too easy to put off saving money till later, yet later rarely comes. How many times have you promised yourself that you'll put money aside with your next paycheck? Or that you'll set aside a portion of your tax refund? Or maybe you should start saving as soon as you earn a raise? Or what about overtime or bonus pay?

We usually get paid, pay our bills, have some fun, and then save the rest. When we claim, "I'll save whatever is left over," we are setting ourselves up for failure. Many of us have good intentions when we say we'll save when we earn our next raise, but we never do. In general, when our income rises, so do our costs, and lifestyle inflation kicks in.

Setting aside money from your paycheck is important to reach your financial goals. Whether your goal is to save $300 for a weekend getaway or $20,000 for a down payment on a house, paying yourself first is crucial. Your financial dreams and goals are worth achieving but you need a plan. Saving often and consistently is also the key to building wealth. When you pay yourself first you give yourself permission to then spend money guilt-free.

So how do we pay ourselves first?

Pay yourself like you pay a bill

We all know what happens when you don’t pay your electric, cable, or cell phone bill. They cut it off. You want to make sure that you have savings and investing as line items in your budget and treat them like a bill. Many times we treat saving as a discretionary item when we really should treat it as a priority. Saving money is no longer just a want, it’s a need.

Create Multiple Accounts

Although it may appear strange, having multiple bank accounts is an excellent method to keep money separate for each of your goals. Keeping a vacation fund separate from a new car fund is also a good method to keep track of your progress.

Automate Savings

There is nothing like having systems in place to save ourselves from ourselves. When your paycheck hits your bank account it might be tempting to use that money for the latest gadget or the big blowout sale. I know, it’s tempting. However, setting up automatic withdrawals from your paycheck or from your checking account into a savings account will help you succeed at paying yourself first. It reduces the temptation to spend money that you have earmarked for saving.

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