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Thursday, 12 April 2012

How to pay yourself first

How to Pay Yourself First

Whether you're creating a budget, spending your latest paycheck or paying off old debts, it's all too easy to overlook your need for savings. If this sounds familiar, it may be time to rethink your priorities and tweak your spending habits accordingly. You should be your own top financial priority. Pay yourself first by putting aside a set amount of money or a set percentage of your paycheck before you pay bills or spend any money.

The best way to do this is to automate the routine. If you never see the money in your paycheck, you probably won't miss it. Set up one or more automated deductions from your paycheck. Deductions may go towards an individual retirement account, a company retirement plan or your personal savings account.

It's best to start early. This gives you the maximum number of years to save up and helps you form the habit early. Then when you need money, you know you'll be protected.

To start, no amount is too small. If you're worried about having enough money left for rent, debt payments and other financial obligations, start by setting aside just 1 percent of each paycheck. But don't just stick with a low percentage.

Once you feel comfortable that you have enough money left to spend, slowly increase the percentage or amount. And when you get a raise or bonus, commit to saving a portion of this extra income. Eventually, you could be saving a fourth of your income — or more — without even noticing it's missing from your paycheck.

Paying yourself first is an especially useful strategy for people who frequently find they have no money left from their last paychecks but can't account for where it all went. Most likely, it isn't all going towards rent, gas and groceries. A large portion of it may be going towards shopping, entertainment and other nonessentials.

If you have this problem, it's not all bad. It probably means that you tend to adjust naturally to whatever budget you have. If you get a raise or a large bonus, you'll spend it all. But if you have a bad month financially, you'll make do with whatever money you have.

So by automatically carving out a portion of your paycheck before you have a chance to spend it, you'll reduce the temptation to use your entire paycheck. You'll naturally form a fund for an emergency, a vacation or retirement. And once you start the habit, you're likely to stick with it and establish your financial future as a priority avoiding future pains such as debt settlement. It won't create any extra work for you or put a strain on your budget.