Building an emergency fund and saving for retirement are important, but a large percentage of adults have little or no savings. If you’re in that situation, you may have to cover an unexpected medical bill or car repair with a high-interest credit card. If you don’t have enough saved when you reach retirement age, you may have to keep working longer than you had planned, make painful cuts in your budget, downsize your home or move in with relatives.
How to Pay Yourself First
Many people think they don’t earn enough to save, or they want to save but they can’t find money to set aside. Financial planning professionals often recommend that you “pay yourself first.” That means that you should automatically transfer money to a retirement or savings account every time you get paid, before you pay bills, buy groceries or make discretionary purchases.
If you have a retirement plan through your employer, you should be able to have money from each paycheck automatically directed to your retirement account. You can set up automatic transfers to a savings account so you can build up your emergency fund or save for another goal, such as a down payment on a house.
Benefits of Paying Yourself First
The problem that many people have when it comes to saving is that they pay others (their mortgage lender, auto loan servicer, credit card companies, etc.) and buy things that they need and want, then struggle to find some money left over to save. Paying yourself first switches the order of things so that you automatically put money toward your long-term goals, then address your other expenses. By making saving for your future a top priority, you’ll build a nest egg much faster.
Having money automatically transferred to a separate account will make it harder for you to spend it on something else. You will still have access to those funds, but withdrawing money from a retirement account or transferring it from a savings account to a checking account will take time. You’ll have to ask yourself if you should spend those funds on something else or if you should set them aside for your future, as you intended to do.
Focus on Long-Term Priorities
You may have to adjust your spending in other areas to cover all your bills. For instance, if you put money toward retirement each time you get paid, you may have less to spend on takeout. Cutting back on restaurant meals may be inconvenient, but cooking at home more often and funneling more money into your retirement account will pay off later.
Set a Realistic Goal
Consider your income, expenses and interest rates on debt and figure out how much you can save each month. Even a modest amount can add up if you’re consistent. Being disciplined and seeing your balance grow may motivate you to save more in the future.
