Pay Yourself First


You have setup your saving account, and decided it is high time to get that emergency fund rolling but where are you going to get that money from? It may be easier than you think. The Personal Savings Rate in the United states had seen better days back in 2006 when it actually dropped below zero, since the start of this recession the rates have actually been increasing. The most recent data released by the Bureau of Economic Analysis shows the Personal Savings Rate at 4.6% for June down from 6.2% in May. This figure isn’t impressive but it at least shows that Americans are saving more now than they have in the recent past.

How People are Doing it

The simplest way to get your savings rolling is to Pay Yourself First. Essentially you should be taking a portion of your paycheck and automagically make it disappear into a savings or investment account somewhere. David Chilton, author of “The Wealthy Barber“, recommends you put away 10% of your income right off the bat. You should then live, and pay bills, with the remaining 90%. When you look at it like that, it really doesn’t seem that unreasonable. If you can’t live off of 90% of your income than you may need to look at your spending habits. At this point we are assuming you have no other savings in place, including retirement accounts. Your first order of business is build up your emergency fund to a reasonable comfortable place for you, by paying yourself first.

How you could do it

  • Start Small
    • Take stock of your current inflow and outflow of cash and try to decide where would be a good starting point for paying yourself. If you think you are going to be hard pressed start off around 3-4% and work your way into it. I can almost guarantee you, you won’t even miss that money. Once you get used to that level of savings slowly increase it 1-2% at a time.
  • Make it automatic
    • If you are already getting direct deposits from your employer go ahead and see if they can do split deposits and have that percentage put into your savings/brokerage account automatically.  If this isn’t an option for you then go ahead and setup a recurring transfer with your bank so the funds are moved out of your account when your check gets deposited.
  • Cut Expenses
    • If you still find yourself struggling to make ends meet at the end of the month you should start looking at ways to cut your expenses. Start with things like eating out, drinking sodas, and other high cost low reward items. This may be a time for you to consider whether or not cable is a true necessity. Cutting out unnecessary expenses will increase your available cash for saving.
  • Earn More
    • It may not sound like the easiest solution, but in almost all financial binds it is the best solution. Earn more! Start vying for that promotion at the office, looking for a better paying job to leverage your current employer, or working side jobs. Every little bit you can supplement your income will ease your concerns with starting to save regularly. Once you create the habit you will be amazed at how you forget it is even happening.

The real key to building your savings is to start the habit early, once you have established the habit and are accustomed to the change start adjusting your savings to ensure you are reaching your goals. This method of saving isn’t intended to be for just your emergency fund, it should be adopted for your retirement accounts, vacation funds, and anything else you may need to save for.

Photo: (Jenn_Jenn)

This article is a part of my Back to the Basics series. I plan to cover remedial personal finance topics which aren’t as sexy, or typically covered, in the personal finance blogosphere. My hope is for people to get a better understanding of basic personal finance without boring you to death, hopefully you will be able to share these posts with family and friends to get them into personal finance and have a good foundation of knowledge.

{ 1 comment }

1 August 12, 2009 at 12:15 pm

One thing that I recommend is for people to automatically increase their savings contributions using their raises. If you typically get an annual 3% raise, in 3 years you can raise your savings contributions to 9%. While it is a shame that someone might feel that they can’t immediately put away 10% of their income, by using this method, in 3 short years you can dramatically change your financial situation.

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