Paying Yourself First: How to Prioritize Saving before Other Priorities

Monthly expenses add up quickly; including rent or a mortgage payment, car payments, student loan payments, and more. You routinely pay these bills each month, and then, almost as an afterthought, you try to figure out what’s left over to save for a rainy day or invest for financial growth. The concept of paying yourself first shakes up that routine.

When you pay yourself first, your top priority is to put a predetermined amount of money into personal savings and investment accounts. Depending on your expenses and income, the amount you save will vary.

When you focus on investing in your own financial wellbeing first, it helps to ensure your discretionary spending doesn’t cut into your financial growth. When you make paying yourself first a priority, it often makes sense to set up automatic transfers from your paycheck to your savings or investment account. If you’re ready to make yourself and your financial future a priority, these tips and strategies could help.

Beyond the Pay Yourself First Definition

The best way to pay yourself first: build a monthly budget that you can stick to. By creating a plan you can stick to, you’ll be better able to pay yourself first and save for the future. The first step is to evaluate your income and expenses, which will serve as the foundation of your budget. It’s important to know the following information about your income:

•  gross monthly income (important to know if you plan to invest in retirement funds)
•  net monthly income
•  anticipated increases in income (although you want to plan based on what you’re actually receiving, knowing you’ll have an increase in the near future may impact some of your decisions)

If your income fluctuates, perhaps based on commissions earned, you could use an average monthly income from the past year.

After you’ve determined your income, make a complete list of monthly expenses, including direct withdrawals that are easy to forget. You’ll then want to categorize them in a couple of different ways. There are fixed expenses and variable ones. Fixed expenses are ones you can anticipate every month, including rent, electricity and utilities, insurance, and student loans.

If a fixed expense varies, like a mortgage with a variable interest rate, make sure to indicate this. Then tally up your variable expenses, like food, gasoline, clothing expenses, and more. Be sure to factor debt in to your budget, including student loans, mortgages, or credit card debt.

Once you have a comprehensive, accurate picture of your spending habits, subtract your expenses from your income to determine your discretionary funds. If your discretionary funds are less than you’d like to see, determine what discretionary expenses you would be willing to eliminate. If you are currently paying for a landscaper to take care of your lawn, could you cut that expense and maintain the yard yourself?

Are there automated monthly charges for services you aren’t actually using? If so, cut them. If you’re looking for another way to improve your discretionary income, review your monthly expenses and see if you can negotiate a lower rate on things like your cell phone bill, car insurance, or cable. Once you have determined your new budget, you’ll have a good idea of how much money you can use to “pay yourself first.”

Create an Investment Plan

With the money you use to pay yourself first, develop a plan to effectively save and invest it every month. If you don’t yet have an emergency fund, that is one of the best places to start.

Conventional financial wisdom suggests having about three to six months of your living expenses saved for an emergency. This money should be readily accessible should anything happen. An emergency fund can be used to pay for unexpected medical emergencies, home repairs, or costs associated with a lay off. Once you’ve stocked away an emergency fund, you can turn your attention to investing.

A smart way to invest in your future is to actively save for retirement. If your employer offers a 401k plan it makes good sense to participate in it. Often times, employers offer matching contributions, which is basically extra money for retirement at no extra cost to you. Take advantage of these benefits and invest a portion of your discretionary income in your 401k.

If you are already contributing to a 401k plan and are maxing it out, consider opening an IRA to amp up your retirement savings. In 2018, the 401k contribution limit is $18,500. If you are over the age of 50, you can contribute an additional $6,000 to your 401k. If you open an IRA, you could save an additional $5,500. And if you are over the age of 50, you can save an additional $1,000 in catch up contributions.

If after setting up an emergency fund and saving for retirement, you have additional discretionary funds left over in your monthly budget, then you could consider investing that money into non-retirement funds.

How to Stay Motivated

Setting an annual savings and investment goal could help you stay motivated to continue saving. Make sure any goals you set are reasonable, based on calculations you’ve made, and use your successes to fuel further successes. If the amount you’re able to invest early on isn’t what you want, focus on the fact that you’ve examined and streamlined expenses and are focused on paying yourself first.

Finally, recognize that, at times, unexpected expenses crop up, ones out of your control. When that happens, don’t beat yourself up. Accept them as a normal part of life and be glad they’ve come up after you’ve created an emergency savings account to address them. Temporarily modify your plan to pay yourself first and, as soon as you possibly can, return to the amounts you’ve been saving and investing.

Savings and Investments with SoFi Invest

If you’re ready to take control of your financial future, consider opening an investment account with SoFi. We offer a unique combination of an experienced team of financial advisors and automated advisory technology. Financial advisors will help you with goal planning, by creating an investment plan specifically tailored to your unique financial situation.

SoFi will also assist with portfolio selection and diversified investments that match your preferred risk level. And SoFi will automatically rebalance your investments to help manage risk. You can begin investing with as little as $100. Plus, there are no SoFi management fees, ever.

SoFi can’t guarantee future financial performance.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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