Pay yourself first is one of those classic pieces of personal finance advice. It’s worked for countless Americans to help them build wealth. But, it is not always clear how it works or how you can make it work for you. Consider the follow three part approach:
1. Create an account that is separate from all your other accounts. This account should be only for a specified goal, usually saving or investing. If possible, choose an account with a higher interest rate–like a high interest savings account. You may not get a whole lot of cash from it, but even at current low interest rates, a couple more bucks wont hurt.
2. Determine how much you want to put into the account and at what interval. For example, you can decide to put in $100 per month, or $50 per paycheck. This will depend on what you intend to do with the money. For example, if you want to put a $10,000 down payment on a home in 36 months (three years), you’ll have to save $278 per month.
3. Set up direct deposit from your paycheck into the account. Have your HR department at work deduct the amount you need to meet your goal from your paycheck. So, if you want to save up that $10,000 have HR deduct $139 bucks from each paycheck – assuming of course that you get paid twice a month.
The main idea here is that you want to set up a separate process whereby you don’t have to do anything to save your money. Pretty much you just sit back and watch the savings add up. The beauty of it is that paying yourself doesn’t require a whole lot of effort and it removes the temptation to do something else with the money – like blow it on expensive coffee or eating lunch out. In fact, paying yourself first is so effective in building wealth that some people call it a “golden rule” for personal finance.
Don’t believe me? Try it and see happens. I bet you save a pile of cash.