In the quest for financial success and wealth building, adopting the "pay yourself first" technique can be a game-changer. This simple yet powerful strategy involves prioritizing your savings and investments before allocating funds to other expenses. By consistently setting aside a portion of your income, you can pave the way for long-term financial security and achieve your wealth-building goals. Paying yourself first will allow you to hit your savings and investment goals. If done properly, most people who utilize this approach see only a minimal effect on their ability to pay for their discretionary spending. In many cases individuals don’t even notice the money is not in their spending account. In this blog post, we'll explore how to effectively implement the "pay yourself first" technique, share real-life examples, and highlight programs and apps that can streamline the process.
Understanding the "Pay Yourself First" Principle The "pay yourself first" principle entails treating your savings and investments as non-negotiable expenses. Rather than saving whatever is left after paying bills and discretionary spending, you allocate a predetermined portion of your income to savings and investments before addressing other financial obligations. This approach ensures that your wealth-building efforts take precedence, setting the foundation for a secure financial future.
How does this work in practice? In many cases, we look at our checking account and we will see how much money we must spend until we reach a minimum number in our checking account. Many people calibrate their spending so prior to their next paycheck, they will have at least a pre-determined figure in their checking account. For this example, let’s say we do not want to see our checking account dip below $750 prior to our next paycheck. After all our utilities, rent, car payments, etc. are paid, we check our account and see we have $1500 with two weeks until our next paycheck. With our simple math, we can determine we have $750 to spend at our discretion before hitting our minimum account value. With this information in mind, we indulge in a fun weekend and a quick weekend get-a-way. When it comes to the end of the month, we find we have about $850 remaining in our account. We still haven’t reached the end of the month or the minimum value, so we can contribute $100 to our investment and savings accounts. Now if we approach the month with the “pay yourself first” mentality and treat our retirement and savings accounts as mandatory expenses with our utilities, rent, car payments, etc., when we check the account, we might see there is $1,000. Most of us will then look at the potential discretionary options and determine we cannot afford to do the more expensive options, but rather choose to spend a fraction of what we would have if we had the $1,500 at our disposal. We may have to alter our plans, but we can still have a fun couple of weeks on $250 of discretionary spending. At the end of the month, both examples end $750 remaining in our account, but by paying ourselves first, we contributed an additional $400 to our retirement and savings accounts.
The best way to execute the “pay yourself first” technique is through direct deposit and automation. If you are writing a check or actively moving money to your retirement accounts monthly, you will most likely notice the difference of having that $500 in your account. If you set it up through automation, most people don’t even notice the $500 is not in their checking accounts. I know I never noticed the money being taken out. People just view they would have $1,000 of discretionary spending for the month instead of $1,500.
Automation with Programs and Apps There are various programs and apps that can help streamline and automate the money movement process to ensure you reach your retirement and savings goals through the "pay yourself first" technique:
1. Acorns: Acorns is a micro-investing app that rounds up your everyday purchases to the nearest dollar and invests the spare change. This automated approach to saving and investing makes it effortless to pay yourself first. 2. Qapital: Qapital allows you to set up customizable savings goals and rules. You can automate savings contributions based on specific triggers, such as rounding up purchases or recurring transfers. 3. Chime: Chime offers an automatic savings feature that transfers a percentage of your direct deposits into a separate savings account. This "set it and forget it" approach aligns perfectly with the "pay yourself first" philosophy.
The "pay yourself first" technique is a cornerstone of successful wealth building. By prioritizing your savings and investments before other expenses, you establish a strong foundation for financial security and growth. Real-life examples showcase the impact of this strategy, and with the help of innovative programs and apps like Acorns, Qapital, and Chime, you can easily automate the process, making it seamless and efficient. Embrace the power of "pay yourself first" and embark on a journey toward a prosperous and financially stable future. Start today, and watch your wealth grow over time.
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