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How to get ahead in your finances: Pay yourself first.

 
 
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If you’ve ever delved into the world of personal finance, you might have heard of the phrase “pay yourself first.” In fact, many investment gurus mention this approach as one of the keys to getting your finances on track and building your net worth.

What does “paying yourself first” mean? This concept can seem confusing initially, so let me break it down. Paying yourself first simply means making yourself a priority. It’s actively choosing to invest in things that build your net worth before you spend money on anything else. 

Pro Tip: This can be hard to do at first. As responsible adults, our first inclination may be to pay our bills, buy necessities, and use whatever is leftover to “invest in ourselves.” The problem with this approach, at least for me, was that there never seemed to be any money leftover. Some unexpected expense would occur or I’d end up spending money on something else that didn’t even need. I never seemed to have money leftover to save or invest. “Paying myself first” helped me change that. Now, instead of spending the majority of my check and wondering where my money went, I do things differently. I invest in myself first, then use the leftover money to pay my bills, reserve money for food and transportation, and spend the remainder on entertainment and incidentals. 


How is it done?  Do exactly what it says. Pay yourself first. In other words, the very first thing you do when you get paid is use a certain percentage of your check to build your net worth.  This means having a set amount of money reserved for the sole purpose of paying down debt, saving for retirement, or investing in other types of lucrative deals. When you reserve money for these purposes, you are actively investing in your future in a way that builds your net worth and puts you in a better position financially. 


Pro Tip: Make this automatic. Outline a budget of your monthly expenses and estimate how much you can afford to save for retirement or use to pay off debt each month. This can be anywhere from $5 to hundreds of dollars each pay period and beyond. Once you have a set amount that you can spend on investments and debt pay down, go into your mobile banking app and get this amount automatically deducted from your check the same day you get paid. Doing this ensures that you are “paying yourself first” and makes building your net worth a priority. It also prevents you from spending your “extra” money on things you don’t need.   


Why does it work so well? Most of know we need to invest in ourselves. We realize that having money is important and that spending all we earn isn’t the wisest thing, but sometimes life can get in the way. Either that or our bad habits can stop us from doing what we know is right. It’s this reason that the concept of paying yourself first was born. It forces us to implement the strategy of investing in ourselves before we do anything else, especially when set up this automatic withdrawals. Unlike other strategies, this method doesn’t rely on our own self-control or fail due to our lack of self-discipline.

Pro Tip: Before I got my first paycheck as a doctor, I set up the payroll from my job in way that would virtually ensure that I achieved my financial goals. The first thing I did was determine what percentage of my income I wanted to store away for retirement and choose the index funds I wanted to invest in to help my money grow. Then, I went to the “banking” part of my work payroll website and decided that I would have 25% of my check directly deposited into an entirely separate savings account. I use the money in this separate account to pay down debt and save up an emergency fund. Because I don’t have a debit card for this account, it’s almost impossible for me to spend this money. Since I don’t really “see” this money in my main checking account, I’ve gotten use to living on the remaining 75% of my take-home pay. 

My point? Paying myself first has helped me in so many ways. I’m investing in my retirement without even thinking about (since my retirement contributions are deducted before I ever get my check). I am also saving more money than I ever have before. I have a separate account for travel that I can now use to pay for my future vacation(s) in cash. Plus, I have paid off a substantial amount of credit card debt that I had from my years as a graduate student. This combination of paying off debt, saving money in separate accounts, and investing for retirement is helping me build my net worth faster than I ever would have thought. As my net worth increases, my credit score gets better. Paying myself first has given me reassurance that I’m on track to reach my financial goals.

Tell me, in what ways do you “pay yourself first?” If you haven’t yet started, is this something you’d be willing to try? 


 

Money Tips You Didn’t Learn In College

Money Tips You Didn’t Learn In College

Be strategic about using credit cards. While having access to credit cards can provide added “protection” during emergencies, it also can be quite dangerous. I don’t know about you, but knowing I can use a credit card to pay for almost anything I want tests my self-control in ways I could have never imagined.

5 Things To Do As A Young Professional To Set Yourself Up For Financial Success

5 Things To Do As A Young Professional To Set Yourself Up For Financial Success

Learn about finance. I get it. Finance can be boring. You don’t want to spend the free time you barely have studying a subject you don’t really like. Hopefully this site can give you some quick tips about finance so that if you merely browse the info on this site you will have some semblance of what to do. Plus, if you want even more information you can use this site to find the resources and tools you need.

You should start caring about money

You should start caring about money

I know, I know finance is “boring.” It is “not your thing” and you plan to just “hire a money person” take care of everything for you in the future.

I hear these excuses and more from my classmates, friends, and other young professionals I come across daily. In the words of famous author Robert Kiyosaki “You think just because you will have a high-income job that you don’t need to worry or learn about money, but that’s wrong. Truth is, most people who make more money just get into more debt”  

Why I started learning about money, despite my [guaranteed] doctor salary

Why I started learning about money, despite my [guaranteed] doctor salary

How could I, a person with nearly $200,000 in student loan debt, even begin to think about financial freedom, investments, or retirement plans when I had no job and was still in school?

Truth is, I had to start somewhere. I simply couldn’t afford not to. The more I waited to educate myself on money management, the longer I would spend making bad financial decisions that could dig me deeper in debt and delay my life of prosperity. Things needed to change and they needed to change now.

Money mistakes to avoid as a graduate student or young professional

Money mistakes to avoid as a graduate student or young professional

Don’t take out more loan money than you need. Figure out your monthly expenses (rent, food, transportation, gas, school expenses, incidentals, etc). Only take out in loans the amount that you need and do so at the lowest interest rate you can find. Although it’s nice to have “just in case” money, for emergencies or unexpected expenses, most of us just end of using the extra money for shopping trips or vacations. So unless you have an unprecedented amount of self-control, it is probably best to only take out what you need.

The basics: What are IRA’s and 401K’s?

The basics: What are IRA’s and 401K’s?

IRAs and 401Ks are types of accounts we use to save for retirement. A 401K is a retirement account offered through your employer and an IRA is a retirement account you can open up on your own (without being employed).