pay yourself first

Posted : February 20, 2018
Last Updated : February 20, 2018
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pay yourself first

Paying yourself first means that when you get a paycheck, tax refund, cash gift, or other money, you should put some of that money in a savings account before you pay your bills.

The Benefits of “Pay Yourself First”

There are many reasons to pay yourself first. You can:
  • Save money toward goals you’ve identified.
  • Improve your standard of living.
  • Learn to manage money better.
  • Have money for emergencies.

Some major expenses people save for include:
  • Unexpected events (e.g., loss of a job, car repair, or unexpected medical bills).
  • Down payment for a house, a car, or other large purchase.
  • Education.
  • Retirement.
  • Vacation.

Savings Tips

Consider needs versus wants. Think about the items you purchase on a regular basis. These add up. Where can you save?
  • Do you eat out at restaurants a lot?
  • Can you cut back on daily expenses (e.g., coffee, candy, soda)?
  • Do you have services you don’t really need (e.g., cable television)?

Use direct deposit or automatic transfer to savings.
  • When you get paid, put a portion in savings through direct deposit or automatic transfer.
  • If you have a checking account, you may sign up to have money moved into your savings account every month. What you don’t see you don’t miss!
  • You may purchase U.S. Savings Bonds through payroll deduction.

Pay your bills on time. This saves the added expense of:
  • Late fees.
  • Extra finance charges.
  • Disconnection fees for utilities (e.g., phone or electricity).
  • Fees to reestablish connection if your service is disconnected.
  • The cost of eviction.
  • Repossession.

Consider opening a checking account at a bank or credit union instead of using check-cashing stores. You might pay two percent or more of each check you cash. Two percent of a $500 check is $10. This can easily add up to several hundred dollars in fees every year.

Put some money into a savings account if you get a raise or bonus from your employer.

Keep making the monthly payments to yourself once you’ve paid off a loan. You can save or invest the money for your future goals.

Save at least part of any cash gift you receive.

Avoid debt that doesn’t help build long-term financial security, including: loans for a vacation, clothing, and dinners out in restaurants. Examples of debt that helps build long-term financial security include:
  • Paying for college education (for you or your child).
  • Buying or remodeling a house.
  • Buying a car for work transportation.

Pay off high-interest credit cards or other loans as soon as you can.

Save your change at the end of the day and deposit it weekly or monthly.

Save as much of your tax refund as possible. Choose to receive your tax refund via direct deposit. You can split it between a maximum of three different accounts (e.g., checking and/or savings accounts). You can also choose to use part of your refund to purchase a U.S. Savings Bond.

Join a retirement plan (i.e., a 401(k) or 403(b) plan) if your employer offers one and deducts the money from your paycheck. Most employers will match up to $.50 of each dollar you contribute. The matched amount is free money!

Do your homework if you decide to purchase investments. Know what you’re investing in and get professional advice if you need it. You should have at least two to six months of emergency cash savings before you begin investing in investment products that aren’t federally insured.

Reinvest the dividends of any stocks you own to purchase more stocks. Some companies offer an easy way to do this called a Dividend Reinvestment Program (DRIP). This process grows your investment faster, similar to compounding.

Join an investment club if you’re interested in learning about investing. Investment clubs are groups of people who work together to understand the process and value of investing even small amounts of money (as little as $5 to $10).

How Your Money Can Grow

Making regular payments to yourself, even in small amounts, can add up over time. The amount your money grows depends on the interest earned and the amount of time you leave it in the account.

Interest and Compound Interest
Interest is an amount of money banks or other financial institutions pay you for keeping money on deposit with them. Interest is expressed as a percentage and is calculated based on the amount of money in your account.

Compounding is how your money can grow when you keep it in a financial institution that pays interest. When the bank compounds the interest in your account, you earn money on the previously paid interest, in addition to the money in your account. Not all savings accounts are created equal. This is because interest can be compounded daily, monthly, or annually.

Annual Percentage Yield (APY)
APY reflects the amount of interest you’ll earn on a yearly basis. It’s expressed as a percentage.
  • The APY includes the effect of compounding. The more often your money compounds, the higher the APY and the more interest you’ll receive.
  • When comparing different accounts, you should compare the APYs of the savings products, not the interest rates.
  • Note that the interest you earn is considered income, and you may have to pay taxes on it.

Rule of 72
The Rule of 72 is a formula that lets you estimate how long it will take for your savings to double in value. This calculation assumes that the interest rate remains the same over time.

Here’s how you calculate it:
  • Divide 72 by the current interest rate to determine the number of years it’ll take to double your initial savings amount.
  • For example, if you invest $50 in a savings account at a 4 percent interest rate, it’ll take 18 years for your initial savings of $50 to double. (72 ÷ 4 = 18)
  • You can also estimate the interest rate you’d need to earn to double your money within a set number of years.
  • For example, if you put $500 in an account that you want to double in 12 years, you’ll need an interest rate of 6 percent. (72 divided by 12 = 6 percent)



Source: PlanningYourDreams.org
 

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