Start Building Serious Savings With a Pay-Yourself-First Strategy

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Many people approach budgeting like this: pay the bills, spend a little, and whatever money is left over goes into savings.

But those leftover pieces often aren’t enough. Not making savings a priority may be the reason nearly a quarter (23%) of Americans have no money in savings, according to a recent financial literacy survey conducted by The Penny Hoarder. Nearly 40% of those surveyed reported saving less than $1,000.

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One way to save more for the future is to make savings a priority when creating your budget. Some refer to this approach as reverse budgeting, while others call it the “pay yourself first” budgeting strategy. However you think about it, focusing on saving first can pull you from the rut of not saving at all and reset your approach to personal finance.

What does it mean to pay yourself first?

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Paying yourself first isn’t really budgeting. This is one way to reset how you manage your monthly income to make savings goals a priority. Setting aside money for “pay yourself first” savings accounts can change your mindset and help align financial goals with how you want to spend the money.

Mark Charnet, founder and CEO of American Prosperity Group in Pompton Plains, New Jersey, suggests that you save about 10% of your net income every time you get paid, the money you get after taxes, health care premiums and 401(k) contributions. Doing.

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If you can’t keep 10%, start small. Bills never stop, and it’s not like you can tell your credit card company that you can’t make a payment this month because you’re working on your emergency fund. We got it.

Looking to start an emergency fund for life’s unforeseen expenses? Get started here with our guide on building a buffer for financial emergencies. Why You Should Use the Pay-Yourself-First Method

How you divide your savings depends on your individual needs, but here are some things to keep in mind when using a pay-yourself-first budget.

setting up an emergency fund

Will you have enough money the next time your car breaks down for repairs? Or how about when you have to leave for your next job opportunity? Emergency funds are designed to take care of big-ticket variable costs that remain outside of your monthly expenses.

increasing your retirement contributions

If you checked your retirement account balance recently and gasped, you’re not alone. A 2022 Bankrate survey indicates that 55% of Americans report falling behind or significantly behind in retirement contributions. Paying yourself first can be a great way to get back on track.

paying off high-interest debt or loan payments

If you’ve dug yourself deep into credit card debt and are struggling to get out, paying yourself off first can help. Putting 10% or more of each paycheck toward paying down your high-interest loan or debt payments can help you bring down that balance faster.

pro tip

Get ahead of fast rate increases with a sinking fund that lets you save a large amount of money fast before a big event or deadline.

Preparing your savings account or checking account for big purchases

Speaking of big events, if you need to buy a car in the near future, put that large amount of cash toward that goal. Saving for a Home or Sending a Child to College? Simply increase your savings contribution to “pay yourself first” each pay period. Just make sure you have enough to cover living expenses.

How to Pay Yourself First in 4 Easy Steps Identify your financial priorities

If you’re unsure about the best way to save money for the future, Charnet recommends talking to a financial advisor, such as a certified financial planner.

“(Those just starting to save) shouldn’t feel embarrassed or get the impression that (they) are too small a fish for a financial advisor,” he said. “That’s not true at all.”

Set a reasonable savings goal

While paying yourself first is a good strategy for building a savings vehicle that can provide a bright financial future, take care not to get too ambitious. Set a reasonable goal that will not make you take loans or dip into savings to take care of daily expenses like utility bills.

transfer money automatically

Automating savings can help you set aside money without even thinking about it. Adjust your direct deposit at work so that a percentage of your check automatically goes into savings. Or schedule automatic transfers from your checking account immediately after you get paid.

keep an eye on your bank account

After your savings are deducted from your income, you can focus your budget on bills, essential expenses, and discretionary spending.

You may find that you have less money for extra things – like entertainment or eating out – but if you pay yourself first, you’ll be in a better financial position to face the future, rather than coming up with money. For when you really need it.

Combine pay first with other budgeting methods

While paying yourself first can get your financial priorities straight and change your spending habits is also no budget. To learn more about some of the most popular budgeting methods, see Which Methods Complement the Pay First or Reverse Budgeting Strategy.

Not sure which budgeting method will work best for you? Take our budget quiz to get personalized recommendations.

Kaz Weida is a senior writer at The Penny Hoarder. Nicole Dow is a former senior writer at The Penny Hoarder.

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