Forgetting to save is no longer an issue when you prioritize paying yourself first. A recent Bankrate survey revealed that nearly three-quarters of Americans harbor financial regrets, making it clear that adopting the ‘pay yourself first’ strategy could assist many in achieving their savings goals.
The concept of paying yourself first empowers you to set aside your savings before attending to your bills or other expenses. This approach shifts your focus towards proactive saving rather than relying on whatever money remains.
Discover how adopting the ‘pay yourself first’ approach can be a game-changer if you’re struggling to save or simply aiming to boost your savings.
What it means to pay yourself first
Prioritizing paying yourself first typically involves directing your funds straight into a savings account, making it less tempting to dip into those resources.
Greg McBride, CFA, Chief Financial Analyst at Bankrate, emphasizes, “The automated payroll deduction or direct deposit method truly embodies the ‘pay yourself first’ mindset. While there may be other interpretations, this is arguably the most practical approach for the majority of individuals.”
Generally, it’s advisable to reserve a checking account for day-to-day expenses and spending.
Paying yourself first carries additional significance as it acts as a safeguard against complacency in saving money. Furthermore, it can serve as a motivating factor for creating a budget and prioritizing savings.
McBride further notes, “It also acts as a protective barrier, preventing us from succumbing to the temptation of excessive spending and inadequate saving. By prioritizing savings, you establish clear limits on your spending habits.”
3 ways to pay yourself first
A practical method to prioritize paying yourself first involves establishing a split deposit system. This entails diverting a portion of your income into a savings account while allocating the remainder to your checking account. Alternatively, you can opt to direct your entire paycheck into a high-yield savings account and subsequently transfer funds to your checking account for bill payments and everyday expenditures.
Checking accounts are designed for managing bills and various expenses. It’s advisable to access funds from your savings account exclusively for emergencies or for planned items and expenses you’re actively saving for.
You can achieve a similar outcome by setting up an automatic transfer from your checking to your savings account, provided your bank offers this feature. This approach can be valuable if you receive your income through means other than direct deposit or if your employer doesn’t provide split deposit options.
Another effective way to prioritize paying yourself first is by participating in a 401(k) plan. When you contribute to a 401(k) at your workplace, your employer directly channels funds into your retirement account.
Use multiple bank account to max out your savings
In light of the fact that the best savings rates are surpassing inflation, it’s imperative to ensure that your savings either keep pace with or outpace inflation. The latter is typically the preferred long-term objective.
With the convenience of bank apps and modern technology, transferring funds between a savings and checking account within the same bank has become effortless. Therefore, it’s often advisable to maintain your checking and savings accounts at different banks. Consider placing your savings in an online bank that is a member of the Federal Deposit Insurance Corporation (FDIC). Not only will this keep your funds somewhat more out of sight and out of mind, but FDIC-insured online banks typically offer more competitive interest rates. In fact, the leading savings accounts currently boast interest rates that outstrip inflation.
After opening an account with an FDIC-insured online bank, it’s essential to conduct a trial transfer of a small sum, like $1. This will allow you to gauge the speed of transfers in case of emergencies and confirm that the account is fully prepared for withdrawals or transfers. If your savings account includes an ATM card, it’s advisable to inquire with your bank about the frequency of withdrawals required to maintain the card’s active status.
What to watch out for
While prioritizing paying yourself first can be advantageous, it’s essential to be mindful of potential pitfalls. Here are some pitfalls to avoid:
- Neglecting Checking Account Balances: Avoid putting an excessive amount into your savings account at the expense of maintaining a reasonable balance in your checking account. Always keep a buffer to prevent overdraft fees and, in some cases, monthly service charges. Being overly aggressive with your savings goals may lead to fees that offset your interest earnings.
- Overcontributing to Your 401(k): Contributing more to your 401(k) than you can comfortably afford might result in fees affecting your checking account.
- Storing Funds in Noninterest or Low-Yield Accounts: Keeping your money in accounts with little to no interest can erode its purchasing power over time. Consider higher-yield savings options to help your money grow.
- Neglecting High-Interest Debt: While saving is crucial, it’s equally important to allocate at least a portion of your funds towards paying off high-interest debt, if applicable. Balancing savings with debt repayment is essential for your financial well-being.
The bottom line
Prioritizing paying yourself first lays the foundation for a successful savings strategy. Begin by setting modest and achievable savings targets to increase the likelihood of consistently growing your account balance over time. Cultivating the habit of saving and adopting the mindset that your savings account is a place for accumulating rather than spending can significantly boost your savings potential.