Whether your expenses are piling up or you simply lack the financial discipline to sock away a few extra bucks every month, there are myriad reasons why it's difficult to amount a sizable savings account.
Here's the problem: Once you get paid, your money has to go several places at once. Bills need to be paid, credit card balances need to be settled, groceries need to be bought, perhaps even some nonessentials, too -- and, in all the shuffle, the money that you should be saving becomes your discretionary income, and what should be your disposable money, you dispose of. Zero savings there.
You're not going to break this cycle until you start treating your own savings account like a bill that needs to be paid monthly, along with your rent, car payment and utilities. You need to learn to pay yourself first.
This means that each time you get your paycheck, the first thing you do is set aside a portion of your earnings to save before taking care of your bills and other necessities. It guarantees that the money you should be saving, you're actually saving. But a "savings-first" plan requires you to budget your money.
Saving, Bills, Fun: In That Order
As personal finance blogger J.D. Roth noted on his site Get Rich Slowly, "Most people spend their money in the following order: bills, fun, saving." Developing the best pay-yourself-first plan should allow you to save some money and still afford your bills and responsibilities -- neither obligation should suffer. So how much should you save?
In an interview with CBS News, financial expert David Bach said that people should save one hour's worth of income every day (that's 12.5 percent of your gross pay). Most people only save 4 percent of their income -- just about 20 minutes of work. The trick is to start slow.
Here's How to Start Saving Your Income
- Calculate how much you can actually afford -- not how much someone else tells you you can spare. Devise a simple budget. Set aside the same amount of money you would for monthly expenses. If they're fixed, like a mortgage, those bills aren't going anywhere. Then, figure how much you can save by cutting back. "You may find that even small changes in spending habits, such as bringing your lunch to work or making less frequent trips to the salon, could create big savings over time," states Wells Fargo's website.
- Take baby steps that would make Dave Ramsey proud. Paying yourself first is about setting a goal and working to increase it. A lot like attaining a fitness goal, start with lighter weights and increase the resistance. "Some will argue that saving [1 percent] is meaningless," Roth said. "But if a skeptic will try to save just 1 percent of his income, he'll usually discover the process is painless. Maybe next he'll try to save 3 percent. Or 5 percent. As his saving rate increases, so his nest egg will grow."
- Strategize. Once you get into the rhythm of saving, you'll know how much to put away, and where to divert it, like a Roth IRA, high-yield checking account or other investment account. Per Wells Fargo, "Split your direct deposit so that an amount or a percentage goes directly into your savings account before you can spend it. Or, set up an automatic transfer for each payday, regularly sending money from your checking account to your savings account. This can help you get used to managing living expenses with what looks like a smaller paycheck, when actually you're building up your own savings."
Follow this plan and check back with yourself in two to three months. Suddenly, everything falls into place: You're able to save a bit, stay on top of your bills and have some money left over, too.
What's the Payoff?
So, apart from the physical cash (which was there all along), where is paying yourself first actually taking you? Roth of Get Rich Slowly states three benefits of this practice:
- It develops good mental savings habits. "You're telling yourself that you are more important than the electric company or the landlord. Building savings is a powerful motivator -- it's empowering," Roth said.
- It creates good financial habits. Remember: savings, bills, fun. By learning to save first, "you're able to set the money aside before you rationalize reasons to spend it," according to Roth.
- Saved money is practical money. That savings will come in handy someday because it builds a cash buffer for everything from emergencies, to retirement funding, to a house down payment. "Paying yourself first gives you freedom," Roth noted. "It opens a world of opportunity.
Keep Your Promise
Investing author Joshua Kennon observes that most people are careful to keep their word to someone, but have no problem lying to themselves. Don't let this happen with your new savings plan.
"As soon as you miss one 'payment,' odds are, you will miss another, then another, until you have stopped saving altogether," Kennon wrote. "The secret to success in this game is not so much the amount of money you are investing, but the persistence with which you are doing it."
Don't just rearrange your income, either -- look for ways to save extra money, any way you can. The Digerati Life recommends doing everything from requesting higher withholdings on your tax forms, to banking savings from coupons and discounts, to pretending you haven't yet paid down your debt (even if you already have). In the long run, it'll make a significant financial difference.
It's never the wrong time to begin saving. "No matter what your age, you should make it a priority to develop a regular saving plan," Roth wrote. "Establishing this habit early can lead to increased financial security later in life."
By paying yourself first, the last thing you'll have to worry about is having zero savings when you need money most.