In our previous article we discussed the basic steps of securing your financial future. As simple as it sounds, there are far more complex steps that need to be taken to fulfill each of the basics in that article. Although seemingly daunting at first, these steps become second nature once you’ve mastered them and become ingrained in your DNA. The rewards set by this discipline are well worth the effort in doing these and include a secure financial future achieved effortlessly by the habits that this will make you follow. In this article we’ll go over the concept of paying yourself first.
The value of saving your money is one that has been inculcated in each of us ever since we were young. Saving money is essential because it sets aside money you’ve earned today for something unforeseen in the future. Savings are categorized according to their liquidity and earning potential. Liquidity, just like the phase of matter it suggests, is the capability for you to use your money. If your money is extremely liquid, meaning you have access to it right away, like carrying cash around, its earning potential is more limited in exchange for that flexibility. On the other hand if your money is less liquid like if it is locked into something like a bond with a set maturity date, then you are unable to gain access to that money right away but it earns more for you in the future.
Now that we have taken a quick analysis at liquidity and earning potential, let’s see what fits best into setting your financial future in motion. Before you decide to go all-out and fully invest in a long-term investment with higher yields over time it’s best to place your savings into a savings account that earns interest over time. A general rule of thumb is to make enough liquid savings to cover 6 months of your absolute basic and necessary expenses, the ones we discussed in our previous article. Once you’ve maintained that, feel free to pay yourself through longer-term investment vehicles like 401k, IRAs, bonds, stocks, real estate and others that may suit your need.
Following these steps will ensure that you get to pay yourself first easily and develop that discipline.
Actually Doing It
The most difficult part is being able to do this in the first place. When your paycheck arrives there are so many temptations to spend it on different things that you may deem as priorities. This is why it is important to set which ones are absolutely necessary and create a plan you’d stick to.
Paying Yourself the Right Amount
You also need to make sure that the amount you pay yourself is not overly ambitious that it deprives you of some of your wants and thus cause you to abandon this principle. Pay yourself a reasonable amount, keep in mind that it shouldn’t be too small because you want to reach that 6-month goal. It shouldn’t be too large either because you want to still spend that money on what you put in budget.
Controlling the Movement
Make sure it’s easy to transfer money from your paycheck into that savings account and on the flip side, ensure it’s difficult to transfer out of your savings account into your regular checking account that you use for expenses. Putting this one-way standard in place will help you pay yourself easily, transferring the money into your savings account when your paycheck comes in gives you less time to hesitate and call it off. It also ensures that once it’s in your savings account it is artificially locked in, I say artificially because you can draw your savings out at anytime but place measures in place that would make this personally difficult for you like needing to make a trip to the bank to take the money out versus getting electronic banking options or an ATM card.
Measure and Reward
Finally, like everything else money-related, you need to measure and monitor the savings account that you have. Constantly checking on how much is in there is essential firstly, because it assures you that the amount is correct and you know it’s not somehow disappearing. Secondly, it gives you a sense of achievement and accomplishment. You can then reward yourself on specific milestones that your savings is reaching, say on the first $100, $500, $1000 you treat yourself out for dinner or go on a short trip. Keeping this cadence of measurement and rewards is something that will get you excited about a task that was not only thought of as mundane but as a necessary evil. It really isn’t and shouldn’t be considered as one.
Following these steps will help you master that first basic step and before you know it, you will have established a substantial amount that you can depend on when the time comes for it. Onward to the next step and closer to financial security we go!