Keep more of your income for yourself. Sounds easy (for rich folks), right? You know, the ones who rake in a lot more money than you do. However, by following the pay yourself first (PYF) principal and budgeting strategies, you may find that managing your money in a way that grows your wealth is possible for you, too.
What does it mean to pay yourself first?
PYF refers to earmarking a part of your monthly income for a particular savings goal before paying anything else, including essential bills. The PYF principal transforms your savings and investment goals from an option into your greatest financial priority.
Some experts believe this to be the best way to save money and say that, if you develop this habit early on, it can “help you develop tremendous wealth.” They recommend setting up an automatic monthly transfer of up to 10-20% of your income and funneling it into your IRA, emergency fund, a savings account, or investment fund.
Is the idea of doing anything with your money before paying your bills a bit nerve-wracking? Don’t worry, you’re not alone. Many people report that this strategy would not work for them, as they fear they would not have enough in the event of an emergency. Though seemingly rational, does this fear actually reflect a real risk?
Is it risky?
Ultimately, it seems it doesn’t. This scarcity mindset limits our financial possibilities and doesn’t protect us better than money management techniques like PYF.
In one study, around 38% of people who earned less than $25,000 annually had zero savings, and 35% of the same group had savings of less than $1,000. Interestingly, the figures weren’t all that different for folks who earned between $100,000 and $149,999 annually—18% of individuals had no savings and 26% had less than $1,000 in savings.
When it comes to money management, it seems that strategy is ultimately just as important as income. Giving your money a purpose through savings and investments is essential to improving your financial well-being.
Of course, depending on the size of your emergency fund and other financial factors, you must decide to increase or decrease the amount you pay yourself so as to avoid getting into a financially precarious position. While frugality is often key to growing savings, giving yourself too short of a leash financially isn’t sustainable.
Treating yourself in a financially responsible way is essential to staying on track with your serious financial goals and developing an abundance mindset about money.
Why does paying yourself work?
This strategy is rooted in behavioral economics and can have a dramatic impact on your financial wellbeing over time.
TheBalance.com puts it this way: When given the choice, people will generally choose immediate creature comforts like cable, high speed internet, and nice clothes over investing in future goals. This makes a lot of sense, especially if you believe that saving and investing are luxuries or if you do not believe in your ability to grow your wealth.
However, when you prioritize and automate your savings, you remove choice from the equation. You are left with a smaller monthly budget to divvy up. Suddenly, cutting nonessentials from your budget and dedicating time to a side hustle to avoid defaulting on bills become more urgent decisions. Plus, you’re simultaneously investing in your financial growth.
Ultimately, PYF doesn’t necessarily require you to increase how much you’re saving or investing, it simply teaches you to prioritize it differently. When we treat saving and investing like luxuries, they tend to take a backseat to impulses and other things that appear to be priorities.
However, when investing in yourself is the very first activity that you habitually and automatically do with your paycheck, you eliminate the thinkwork. Over the long haul, this strategy can help you to trim spending and accumulate wealth even from an income that initially seemed insufficient for ‘luxuries’ like saving and investing.