We live in a world full of instant gratification, money on hand be damned sometimes.
And with that desire to have things now, many of us fall into the trap of getting into debt through the use of credit cards, personal loans, home-equity lines of credit, or even worse, a 401k plan loan.
Many think that having debt has become a way of life, along with the other responsibilities of putting a roof over your head, clothing on your back, feeding your kids, and having a reliable vehicle to take you to work or school.
And as a result of all this spending, many of us save absolutely nothing each month. After all, if all of our money is going towards paying our bills and our debts, it should come as no surprise then when we aren’t making any progress to reach our short term financial goals or even have enough to retire one day.
But we can reach our short term financial goals and even have enough to retire one day. We just have to save something, anything, every single month. How do you do this when you feel stretched to the limit?
You make it a point to pay yourself first.
Forest Through The Trees
I know that with all the responsibility that comes with life, on top of the debt, it can be easy to lose sight of how to thrive and save in today’s financial world. The keyword for many of us is “survive,” whether it’s this week or this month, then look ahead to the next.
When debt payments are added on top of your monthly bills, it can be hard to even think about getting past this month. But by saving money, you can get past this month, and eventually have money leftover too.
Remember, you should always be your number one priority when it comes to your money. After all, you earned it. You shouldn’t give it all away to those who don’t have your own interests at heart.
But how do you go about paying yourself first?
Paying Yourself First
What does “pay yourself first” mean, anyway?
It is a simple concept that says whenever you are making a budget, you always set some money aside for saving first. Yes, first. Even if you know you can only put $20 on that line of your budget to start with, put something there. No budget should ever have a blank spot next to savings, no matter how much debt you have.
And if your financial situation is really tight, you might only be able to save $5 a month. This is OK. Don’t focus on the amount, but rather focus on creating the habit at this point.
The first step to becoming wealthy is making an effort to put something in a savings account every month. If you are in debt, that savings will help build your emergency fund, which is the buffer between you and life.
Always tweak your budget so you put at least something away every month. Even if you have a $500 or $1,000 emergency fund already, you should still make it a point to save money every month. Never fail to save something.
Savings should be the first line on your budget, no matter what.
No excuses.
Make your budget work so that you save something every month. If that means cutting back on one Starbucks coffee each week, so be it. Starbucks won’t go broke without your business. And you can survive a day drinking the free coffee at work and not a Starbucks coffee.
The Next Steps Of Paying Yourself First
As you follow your budget and make progress towards paying off debt, you will find you have more money in your budget. This money isn’t there to be spent. It is there to save more.
Your goal is to first build up a savings balance of $1,000 in an emergency fund. Once you reach this goal, congratulate yourself. You did great at making it a point to save. But your work isn’t done yet.
Now you need to build your emergency fund more. You need to get it to the point of being able to cover your expenses for 6 to 9 months. I like to have more money in my emergency fund just because you never know what might happen. That extra buffer is a peace of mind for me.
Once you have your emergency fund fully funded, it is time to start thinking about retirement. You will pay yourself first here as well through payroll deductions. Before you even see your money, your employer takes the money from your paycheck and saves it for you. It doesn’t get any easier than this!
While it would be ideal to save between 10 and 15% of your pay into your retirement account, this might not be feasible for everyone. Take a few minutes to see how much you can afford to save towards retirement. You can use most of the money you were saving in your emergency for this.
For example, if you were saving $100 a month in your emergency fund, save $100 in your 401k plan at work and stop saving in your emergency fund.
Alternatively, if you want to create a larger emergency fund, you could save $75 in your 401k plan and put $25 into your emergency fund. The choice is yours.
And as you pay off more debt and earn more money at work or on the side, make it a point to increase the amount you are saving each month towards retirement as well. Never settle for your current savings amount. Challenge yourself to save more.
Final Thoughts
At the end of the day, paying yourself first is the key to getting ahead financially. When you pay yourself first, you ensure you save something every single month. As a result, any major expense that arises won’t be a crisis, but just a nuisance all because you paid yourself first and built an emergency fund.
Taken one step further, by paying yourself first and saving for retirement, you ensure you have a well-funded nest egg to one day use to enjoy life after work.
Remember that the most important factor in all of this is that you create the habit of paying yourself first. Don’t focus on the amount you can save. Focus on the act. Make it a routine, make it a habit. As time goes on, you will find it is easier to save more and more money every single month.
Author Bio: Jon Dulin helps people get out of debt and start investing for their future. You can read his tips and tricks to enjoy a more abundant financial life at his blog MoneySmartGuides.com.
You can call me Max…I’m a Gen-X executive planning to retire from the corporate grind by the age of 45. Although I’m already financially independent, I haven’t yet reached true financial freedom. Join me on my journey as we discuss everything from personal finance to travel and beyond.