Some principles of personal finance should be taught in primary school, and then again in high school, and college. The one about paying yourself first is so important that it should be written on every paycheck you’ll ever get.
Paying yourself first means taking care of your long-term needs. It’s knowing the importance of being insured and make sure there is money going into it every month. It’s understanding that retirement savings work best when they start early.
Paying yourself first is the approach to personal finance that recognizes you have a responsibility towards yourself. It also declares that said responsibility shouldn’t be second to things like paying your bills.
Sometimes, however, it can be difficult to figure out how to pay yourself first. You can understand it’s the right thing to do, but also be too busy trying to stay on top of current expenses. So let’s see if we can help you get to that place where you can proudly say that you are getting paid.
Give It the Right Priority Level
If you’d split all your expenses into two categories, you’d have mandatory expenses on one side, and discretionary expenses on the other side. For the latter, you’d use the money that’s left after you’ve paid the former.
A common mistake is to think that the money you pay yourself – insurance, debt repayment, savings – comes from the leftover pile. It shouldn’t. If it does, you’re doing it all wrong. It’s not “paying yourself,” it’s “paying yourself first” for a reason – it’s a mandatory expense. Treat it like that.
Start by Paying Off Debt
The first thing you should do is pay off the worst debt you have, the debt that has an interest rate that’s seriously eating into your ability to pay yourself, and have money left for other important things. This is usually a credit card or something like that – the kind of debt we take on either because of necessity or because we simply don’t know any better.
You should do your best to pay it off as soon as possible. Save on any other budget item that you can, always make it the first buck you spend from your paycheck, and don’t fall into the temptation to skip a payment or pay less than the most you can. You’re not so much pay off debt as eliminating it from existence. Give it no quarter.
Figure Out the Next Steps
When you’re rid of the worst debt you had, you’re free to figure out how best to pay yourself in this new situation. It’s unlikely that you’ll have enough money to open five savings accounts and buy three types of insurance, all the while paying off your college loan.
You’ll have to prioritize in the beginning. Balancing is key here – you want to be left with enough money to live of, but you don’t want immediate life to jeopardize future wellbeing. You should start with an emergency savings account, and a retirement account. You can build up from there.
Remove the Human Element When Possible
What’s the best way to make sure that you don’t skip a single payment? Remove yourself out of the equation. If you want to make sure that the money’s on your savings account and that your insurance is regularly paid, automate the process. You’ll have one thing fewer to worry about.