How many bills do you pay in any given month? Considering that it’s virtually impossible to avoid spending money on a daily basis, most people probably lost track of the number years ago. From utility companies to wireless providers, everyone is collecting money from your paycheck. However, are you neglecting to pay the most important person?
The most significant payment you should make this month is to yourself. The concept of “pay yourself first” is a golden rule in personal finance, and it involves placing a priority on savings. Instead of trying to save what money is left over at the end of the month, which always seems to be less than predicted, you should place money aside before spending your paycheck on anything else. This does not mean you should stop paying monthly bills in order to save, but rather, adjust your spending habits so you find a healthy balance between savings, necessities, and wants.
Saving money may feel like mission impossible, but the numbers show that Americans have plenty of room to sharpen their skills. A recent survey from RetailMeNot finds that while a majority of consumers have some kind of a financial safety net, 48 percent don’t have enough savings to last more than one month without an ongoing source of income. Only 28 percent of respondents have enough savings to last one to six months, and 16 percent say their savings would last six to 12 months. A quarter of people with a savings account don’t even know the balance.
The first step to pay yourself first is to crunch the numbers. Magnify Money writes: “Sit down and write a list of your monthly expenses. Consider costs like your cell phone, rent, utilities, tuition (or student loans), any debt payments, groceries, and your ‘fun fund’ for eating out, going to the movies, or bar hopping. After adding up your expenses, subtract your expenses from your monthly income.” If your expenses outweigh your income, you need to find ways to cut spending or increase income.
Once you have a surplus on paper, it’s time to set a reasonable percentage to save. Even saving only 1 percent of your income will help improve financial habits over time. Remember, life is full of surprises, so not every month is filled with the same expenses. Select a percentage you can maintain and eventually increase to your ultimate target: for example, 15 percent.
Next, set up a savings account so your contributions can be diverted away from your checking account and temptation. Your current bank or credit union may offer an attractive savings account, but higher interest rates — albeit still low on a historical basis — are usually found with online-only banks. It may seem futile to save money at such low rates, but the process of saving money and accumulating an emergency fund is more important than the return on your idled money.
Finally, set your contributions so they’re automatically transferred directly from either your paycheck or checking account. Many people already employ a similar strategy with with their 401(k) plans — money is pulled from your paycheck before you have a chance to spend it or miss it. Using this method consistently will help you build a sizable savings account for your future needs. Most importantly, it will help you face your monthly budget and develop better financial habits.
Follow Eric on Twitter @Mr_Eric_WSCS
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