Establishing Savings: Pay Yourself First

For anyone struggling with debt, juggling bills may become a well-practiced, circus-style feat. Like the circus performer who manages to keep a number of balls (or even flaming objects) in the air at once, the expert financial juggler learns to manage his or her household bills in a similar way– by circulating them and keeping them in perpetual motion.

Usually, this financial juggling act is accomplished by staggering bill payments throughout the monthwhile waiting for one’s cash flow to recover. But, truly daring bill jugglers may also accomplish theirfeat by skipping payments to some creditors who may tolerate such neglect or by arranging to send partial payments (with or without the creditor’s consent). Finally, when all alternatives have been exhausted, financial jugglers will often “borrow” money from their own savings to pay their monthly bills.

Most people who have done it would agree: juggling is hard work, financial or otherwise! In addition, with pressures from bill collectors and banks being what they are, few jugglers would ever consider performing such hard labor to insure payments to their own, personal savings accounts. We don’t juggle for ourselves— to make sure our own savings accounts are regularly funded. Rather, juggling is done for the sake of others, to make sure as many of our bills as possible are covered. In fact, the savings account, because it is easily accessed, is usually the first fund to be drained in order to pay monthly obligations.

Thus, financial juggling is not only difficult to perform, it is more, importantly, counterproductive, as well. The inevitable draining of personal savings is not only a band-aid solution to larger budgetary problems, it ultimately makes a person vulnerable to even deeper financial crisis due to unanticipated emergency expenses.

Therefore, somewhere in your plan to juggle, paying yourself, or in other words, paying into your own savings account must become a priority. Because, without savings to help you reach your financial goals and to help cushion the blow of unanticipated expenses, it is nearly impossible to break the debt cycle!

The importance of establishing a personal savings plan today cannot be overstated.

First of all, establishing a personal savings plan involving regular contributions , no matter what the amount, will help insure your future financial security. For instance, gradually building up an “emergency fund” of savings, consisting of 2- 3 months of living expenses, is perhaps the most important step you can take to protect yourself and your family against any sudden financial crisis.

Second, establishing a personal savings plan today will provide you with an immediate, accomplishable financial goal.

With this savings goal in mind, you will be much more likely to stay within your personal budget and remain in control of your spending.

Finally, watching your savings grow will enable you to feel better about yourself and allow you to experience more control over your own financial future.

Shouldn’t I wait until I am out of debt to start saving?

Many people believe that they should wait until they are completely out of debt before beginning a savings plan. After all, how can a person afford to accumulate personal savings when he or she is receiving monthly reminders that bills are overdue and that money is owed to others? The truth is, a person cannot afford to be without savings! And, indeed, the very best time to start saving is right now!

Contrary to what you might imagine, the “number one” obstacle to establishing savings is not lack of funds but, procrastination. Starting your savings plan today– no matter the amount you put aside– will simply put you that much further tomorrow.

You might think there’s no better “trick” to saving than hard work and long hours. But, some very hard workers, with long working hours under their belts have little to show for their efforts in terms of savings. That’s because, they were so busy working they didn’t make time to establish a savings plan and set up the necessary systems to execute their plan.

Getting the cash to start a savings plan may seem like an impossibility, especially while you still owe and are juggling your current bills. But, there is a system that will help you get the cash you need to start saving. Some people find it so simple and effective, they say it works like “magic”. Well, it’s not a magic formula–but, almost. It’s called “Pay Yourself First” and it’s a common sense concept promoted by financial advisors to their private clients for years.

What is “Pay Yourself First”?

To explain “Pay Yourself First”, it’s important to point out, first of all, that most people practice just the opposite of this simple concept in attempting to save. That is, most people look to put aside savings after they have paid all their monthly bills and completed their desired purchases. Then, as you might expect, after bills and purchases, many people find there is little or no money left for savings, particularly amongst those who are strapped for cash.

In contrast, practicing “Pay Yourself First” means just that. First, you determine the amount of money you can realistically save from the paycheck you receive and you immediately put that amount of money aside in savings before you pay any of your monthly bills and before you make any desired purchases. This simple method insures that a regular portion of your paycheck always ends up in savings because you have “paid yourself” the way you would have paid any other bill. Cash you didn’t expect to have for savings “magically” becomes available because, after you have made your payment to yourself, the rest of your monthly spending will adjust according to the money you have remaining after saving and regular bill paying.

Admittedly, with this method, you may wind up making fewer purchases toward the end of your pay-period, but you will undoubtedly feel better about the money you have saved at the very start. Indeed, you may even be able to spend with less guilt throughout your pay-period because you will have already contributed to your savings account!

How much should I save from each of my paychecks?

Of course, the actual portion of your pay that you assign to savings is up to you. Just remember that the real effectiveness of the “Pay Yourself First” concept depends upon having accurate knowledge about your monthly bills and obligations (though use of a personal budget and spending plan). This way, you can appropriately determine the amount to “pay” into your own savings account before you start to pay everyone else.

Some people say 10% is a good goal to save from each paycheck. But, think about it for a moment. Even if you save just five or ten dollars from each of your paychecks, that’s money that you very likely would not have held on to otherwise. Regardless of the amount, try and make regular payments to yourself from each and every paycheck. Making regular contributions of any amount means your savings will grow each month and, of course, should additional cash become available to you in the future, your habit of saving money will, conveniently, already be in place.

In addition to practicing the “Pay Yourself First” system, establishing a direct deposit savings plan will help out also. With direct deposit, offered by many employers in cooperation with local banks, a portion of your paycheck that you designate for savings is automatically deposited into your personal savings account before you receive the remainder of your paycheck. The “trick”, of course, is that if you don’t see it, you can’t spend it! Direct deposit into savings is a simple and relatively painless way to curb your own spending and insure your savings habit.

As described above, the money you designate for direct deposit is typically assigned to a simple savings account. However, you may also be able to directly deposit into a brokerage account for the purpose of investing, a savings bond deposit fund, pre-tax retirement fund, or an educational fund, vacation club, or holiday gift club account.

Even if you do not wish to open up a savings account at a bank, you can still practice the important habit of “pay yourself first”. Instead of paying yourself first into one or more bank accounts, just set up an “envelope savings system” in your own kitchen. Designate one or more manila envelopes to hold your savings. Label each envelope “emergency savings”, “vacation account”, “birthday fund”, etc. and simply slip the amount of cash you have decided to pay yourself into each envelope immediately upon cashing your paycheck. Of course, the envelope system may save you fees and some trips to the bank, but remember, you’ve got to be quite self-disciplined to maintain this more informal savings system.