7 Reasons You Really Need to Pay Yourself First (Seriously)
By: Kentin Waitson - January 09, 2017
It's a familiar refrain in the world of personal finance: "If you want to build wealth, you've got to pay yourself first!"
But what does paying yourself really mean and how can such an odd-sounding notion radically alter the course of your financial life? Paying yourself first simply means setting aside part of your income in a savings or investment account before you do anything else — before you upgrade your smartphone, buy new jeans, pay the utilities, or spring for happy hour drinks for your three closest friends.
Thinking of your savings plan as a bill you must pay on a regular schedule automates the act of saving and can build significant wealth over time. Still not convinced it's the path of personal financial security? Read on. Here are seven reasons you should pay yourself first.
1. It Sets Proper Priorities
What's more important than funding your future? What priorities eclipse your family's long-term financial security? Paying yourself first sets in motion an idea that's crucial to successful saving: I matter and I'm going to start acting like it. Remember, wealth-building doesn't happen by chance; it's the result of intention, consistency, discipline, and big-picture thinking.
2. It's Easy
Paying yourself first through automatic payroll deductions is a simple and pain-free way to save. The "set it and forget it" approach makes saving and investing easy because the money is redirected to a 401K, IRA, savings account, or other investment vehicle immediately. Why is that immediacy so important? Because it helps avoid that nagging sense of deprivation that's laid waste to so many people's best financial intentions.
3. It Taps Into the Power of Dollar Cost Averaging
With dollar cost averaging, investors buy a fixed dollar amount of a particular stock or investment, no matter what the share price. Because the investment occurs at routine intervals, that fixed dollar amount buys more shares when the price is low and fewer when it's high. This investment technique helps avoid the risk associated with dropping a lump sum in the market at a moment when share prices are high (a move that gets you less for your money).
4. What's Last Is What's Left
There's a name for folks who try to save only what's left over at the end of the month: They're called spenders. New wants and needs always have a way of creeping in and rapidly consuming any surplus. Paying yourself first — taking your savings right off the top, investing it, and efficiently managing the rest — is a far superior strategy.
5. It Builds Discipline
Paying yourself first by contributing a fixed amount of money regularly to a savings or retirement account builds financial discipline — a discipline that can be applied in countless other financial and nonfinancial ways. As with all habits, saving becomes easier over time. As you watch your wealth grow, you'll want to find new ways to cutback on expenses, increase your income, and save more.
6. It Creates a Healthy Work/Reward Cycle
Ever feel like modern life is an endless cycle of work-spend-repeat? An effective way to overcome that nearly universal sentiment is by starting a savings plan and watching your wealth grow. Paying yourself first creates a new cycle — one where all that hard work steadily increases your net worth, expands your opportunities, and offers a level of freedom that more stuff simply can't provide.
7. It Models Smart Financial Strategy
I've always been an advocate of discussing money with kids. Of course, you don't want to burden children with adult money worries, but it can be immensely valuable to model and explain effective money-saving strategies like paying yourself first, avoiding credit card debt, and living within your means. Encouraging a level of financial transparency demystifies the world of personal finance and helps kids build the practical money management skills that will serve them well in adulthood.
Article source: Wise Bread