“Paying yourself first” is a simple strategy to prioritize savings and investments by setting aside a portion of your income before covering other expenses. This approach helps you consistently work toward financial goals like retirement, emergency savings, or building wealth, while encouraging disciplined saving habits and reducing impulsive spending. A financial advisor can help you create a budget and optimize your investments to make the most of this strategy. Here are five common ways to pay yourself first.
1. Create a Savings Strategy
Creating a savings strategy is key to achieving financial stability and meeting your short- and long-term goals. Start by reviewing your income, expenses and current savings to determine how much you can set aside each month.
Once you have a clear picture of your finances, prioritize your savings goals. Whether you’re saving for an emergency fund, a down payment on a house, or retirement, having specific targets will keep you motivated and focused.
Consider automating your savings by setting up automatic transfers from your checking account to your savings account. This “pay yourself first” approach ensures that saving becomes a non-negotiable part of your financial routine and can help you avoid the temptation to spend money that should be saved.
2. Contribute to Your Employer’s 401(k) Plan
Contributing to your employer’s 401(k) plan is another common strategy for paying yourself first and securing your financial future. A traditional 401(k) plan allows you to set aside a portion of your pre-tax income, which not only reduces your taxable income but also helps your retirement savings grow over time.
Many employers offer matching contributions, which can significantly boost your retirement fund. By taking full advantage of these matching contributions, you essentially receive free money that compounds over the years, enhancing your financial security in retirement.
To make the most of your 401(k) plan, consider increasing your contribution rate whenever possible. Even small increases can have a substantial impact over the long term due to compound interest.
It’s also important to review your investment options within the plan so that they align with your retirement goals and risk tolerance. Regularly monitoring and adjusting your contributions and investment choices can help you stay on track to meet your retirement objectives.
3. Automate Your Savings Each Month
Automating your savings each month is an effective strategy to help you set money aside for your future. Many banks and financial institutions offer options that make it easy to schedule automatic transfers from your checking account to a savings or investment account, allowing you to prioritize your savings goals with minimum effort.
One key benefit of automating your savings is taking advantage of compound interest. Over time, this can allow even small, regular contributions to grow substantially, especially if your savings are directed into a high-yield savings account or investment vehicle.
4. Contribute to a Cash Value Life Insurance Plan
Cash value life insurance combines life insurance coverage with a savings feature. Unlike term life insurance, which covers a set period, this provides lifelong protection and allows cash value to grow over time. The cash value grows tax-deferred, so taxes are not owed on the gains as they accumulate.
Policyholders can access the cash value of a life insurance policy through loans or withdrawals, offering flexibility for needs like supplementing retirement income or paying for a child’s education. Contributing to such a policy provides financial security for beneficiaries while building a personal asset. However, avoid costly additional features you may not need, and remember that earnings from withdrawals are taxable.
5. Increase Your Savings Not Your Lifestyle
Higher income can lead to higher spending. As a result, this type of lifestyle inflation can eat into your savings, and slow down your financial growth and wealth building. One common strategy to continue paying yourself first is to redirect raises or bonuses into savings or investments. This can help you develop strong saving habits to manage unexpected expenses.
Borrowing from an earlier strategy, you can avoid lifestyle inflation by automating your savings. Set up automatic transfers from your checking to your savings or investment accounts each month, making saving a regular part of your routine. Treating savings like a bill helps you build wealth over time and creates a strong financial cushion for the future.
Bottom Line
“Pay yourself first” by automatically saving or investing a portion of your income before covering other expenses. This strategy can help you prioritize your financial goals, build an emergency fund and reach different milestones, including buying a home or retiring comfortably.
Financial Planning Tips
-
A financial advisor can help you create a financial plan to reach different goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
-
If you want to know how much your money could grow over time, SmartAsset’s investment calculator could help you get an estimate.
Photo credit: ©iStock.com/BongkarnThanyakij, ©iStock.com/SOMKID THONGDEE
The post 5 Ways to Pay Yourself First appeared first on SmartReads by SmartAsset.
