You've probably heard the old adage "pay yourself first." But what does it really mean? And how do you do it?
Paying yourself first means that before you pay utility bills or gym memberships or car payments, you set aside money in a savings account. Too many times people do the opposite and plan to save whatever money is left over at the end of the month. The problem is that there's usually not much left!
By paying yourself first, you make saving a priority. Good money habits start with changing your mindset. You might think it makes no difference whether you save $100 at the beginning of the month or at the end, but you'll find 100 ways to spend that $100 during the month, and that $100 is unlikely to ever arrive safely in your savings account.
Pay Your Savings Account First
The most successful way to ensure that you'll pay yourself first is by automating your savings. It's easy, since you don't have to do anything once the system is set up, and it's painless, since you won't miss money you don't see. With your savings on autopilot, money is transferred to your savings account and your savings grow due to your regular contributions and the magic of compound interest.
There are a couple of factors to consider when automating your savings. The first is direct deposit. Rather than cashing your paycheck and depositing some arbitrary amount, ask your human resources contact at work to transfer your salary directly into your checking account. There are a few great benefits to direct deposit:
- saves you a trip to the bank
- no risk of losing a paper check
- usually no mandatory hold period, as with paper check deposits
- employees with direct deposit get paid earlier (usually if payday falls on a weekend, the payment is transferred early Friday morning)
- option to split salary among other accounts, such as a money market savings account
If you need cash during the week, you'll still have to make a trip to the bank or to an ATM machine, but the amount you designated for your savings accounts will already be earning interest.
Automatic Transfers into Savings Accounts
Once you've set up direct deposit for your paycheck, you can set up automatic transfers into high-yield savings accounts that are linked to your checking account. With an automatic transfer, you don't have to remember to initiate the transfer each month.
After you've linked your checking account with a high-yield savings account--your bank, especially online banks, will have instructions on how to do this--you can set up the automated transfers so that money is moved on a set schedule from your checking account into your savings account.
For example, if you want to save $200 per month, you would create a rule that $200 would be automatically transferred from your checking account into the high-yield savings account on the first day of each month (or whichever day you choose).
If you are interested in automatic recurring transfers from your checking account, be sure to research money market accounts as well as high-yield savings accounts to see what type has the best terms and options for your banking needs.
Once you have automated your savings, it turns into a Ron Popeil rotisserie--set it and forget it! (Well, do read your monthly statements.) The quicker your money makes it to your savings account, the more successful you'll be in reaching your goals. Also, with cash a little less accessible, you might start to reconsider purchases that would require a trip to the ATM.