A simple shift in strategy can radically improve your financial future: pay yourself first.
What does that mean? It refers to setting aside a certain amount of your income for saving or investing as soon as you receive your paycheck. Studies show that what we don’t see doesn’t significantly impact our lifestyle, and we typically adapt easily to living with a slightly lower amount in our checking accounts. Even saving as little as 5 to 10% (although we would suggest striving for 20% or more) of every paycheck can add up to a significant amount in the long run. Some options as to where this money can go include an emergency fund, a retirement account (like a 401(k) or IRA), a savings account, or an investment account
That said, how does one start? First, open a separate savings or investment account, preferably one that is not too easy to access with your debit card. Second, decide on a percentage or fixed amount that you will save each month. Thereafter, set up automatic transfers from your checking account to your desired savings or retirement account on your scheduled payday. Many employers will also allow you to utilize direct deposit to set up multiple destinations for your paycheck in various amounts. Finally, if it’s going to a 401(k), IRA, or investment brokerage account, you’ll need to set your investment funds for each contribution.
Finally, remember that starting small is totally acceptable. Even $25 a week is better than nothing. Once you are ready, try increasing the amount over time gradually. You might try this when you get a raise, pay off a debt (like a credit card balance or loan), or reduce spending in another budget area.
Why do this? Small amounts will add up quickly over the years. For instance, if you start saving $150 per month at age 25 and invest it with an average 6 percent yearly return (a low return by historical standards), by the age of 65, you will have over $500,000! However, if you wait until the age of 35 to start saving the same amount, you may only have half the amount (~$250,000). The power of compound growth goes hand in hand with paying yourself first; prioritizing it shifts your mindset and living to building a stable future.
So, please do yourself a favor. Don’t wait to implement this strategy. Start today to pay yourself first. Your future self will thank you!