You set out to pay bills every single month. You pay the electricity company, the mortgage lender, the trash collector, and so on and so forth. Do you pay yourself? One of the basic rules of investing is that you should “pay yourself first”. This means that the first payment you should make every single month (before embarking on a bills payment spree) is into your savings account.
Saving pattern of Americans vary widely. And most of the time, Long term savings program can be interrupted by short-term economic trends. For example, during the housing and banking crisis of May 2008, the U.S. Personal Savings Rate spiked from 3.5% to nearly 8%. As the economic environment stabilized it then sporadically rose and fell.
THE GENIUS OF PAY YOURSELF FIRST
Saving can be a challenging feat and anyone who has ever managed their finances knows this. There always seems to be an endless array of expenses demanding a piece out of every month’s paycheck. This is where the genius of paying yourself first shines bright: by paying yourself first, you don’t have to scrimp for leftovers after you have paid all the bills.
Prioritizing is the trick. Putting your future at the top of this priority list is a great step. In the beginning, saving might mean you have to change your lifestyle a little. Most people love to see a steady increase in their net worth so finding ways to save and saving is not a short term challenge but a long term commitment for them.
PUTTING YOUR MONEY TO WORK
What will you do with the money you save? It is important to have a good plan about what to do with saved up funds. If your priority is retirement then it would be best for you to consider making investments that are tax advantaged. Retirement plans that are Employer-sponsored, such as 401(k)s and 403(b)s, where the funds are taken out of your paycheck before you even see it is a great way to save. Also, some employers even offer to add a percentage of your contributions as an added incentive.
In addition to your retirement funds savings, if you want to save funds that you would be able to access before you retire, then you should set up a separate account and place funds for that purpose and when the balance gets to your target you might consider putting the money into investments with potential for higher returns. This could involve risks, so you should choose an investment vehicle that matches your risk tolerance and long term goals.
Good habits are the most valuable assets in the pursuit of wealth. I am going to say it one more time – From today you should develop and nurture the habit of “paying yourself first”. The sooner you begin paying yourself, the better chances your savings have to grow.