12 Steps to financial wellness step 7: Pay yourself First
“Pay yourself first” is a catchphrase that means prioritizing your savings above other expenses. Savings should not be an afterthought or an extra that only happens if there’s money left over at the end of the month. Instead, putting aside money should be a fixed line on your budget that happens every month without fail.
Here’s how to successfully pay yourself first.
Review your spending
Take a clear look at your spending. If you already have a budget, this will be as simple as reviewing the column that lists all your expenses, including your discretionary spending. If you don’t have a budget, track your spending over several months to identify your primary expenses and find the average amount you spend each month.
Set short- and long-term saving goals.
Short-term savings, or funds you want to be able to access in the near future, if necessary, can be allocated to an emergency fund. For example, experts advise having three- to six months’ worth of living expenses set aside in an emergency fund in case of a sudden, considerable expense or loss of employment.
Long-term savings should include funds you can afford not to touch for several years or more. For example, your long-term saving goals can include your retirement, a downpayment on a home, a new car, a sabbatical from work, or any other super-big expense.
Narrow down your short- and long-term goals, then attach a number to each savings category.
Set a timeline for each savings goal
Now that you have a number for the amount you want to save, you’ll need to work out a realistic timeline for meeting those goals. It’s best to prioritize your emergency fund, but at the same time, it’s a good idea to start saving for retirement today. Compound interest has an opportunity to work its magic. To that end, you may want to allocate the bulk of your monthly savings to your emergency fund until you meet your goal. Once your emergency fund is complete, you can divide your savings more evenly between your short-term and long-term savings.
Calculate how much you’ll need to save each month
Take your total for each goal, and divide it by the number of months in your timeline. For example, if you’ve decided you want to have an emergency fund of $24,000 established in four years, you’ll divide $24,000 by 48 months to get $500 a month. This is the amount you’ll need to set aside each month to reach your goal in time. Do this for each of your goals.
Automate your savings
Once your savings plan is ready, it’s best to make it automatic. For example, you can set up a monthly transfer from your credit union checking account to your credit union savings
account [or share certificate]. Then, your savings will grow even when you forget to feed them.
Can you believe you are already on step 7? Your financial wellness is right on track. And now you know what it means to pay yourself first. Missed the other steps? Check out our MoneySmart Tips to learn how to keep your financial health.