Pay Yourself First to Reach Your Savings Goals
Setting Financial Goals – Let’s Get Real
I’m going to be a bit more brutally direct today than usual. I feel like we’re pretty tight by now and that you can take it. You know that what I’m about to say, I say in love. I’m also reminding myself as much as anything, so you know I’m right there with you.
It’s good to have both short and long term financial goals. Just like our personal weight goals or the ‘To Do’ list we make for stuff we’d like to get done around the house this weekend, we can’t chart a very good course if we don’t know where we’re going. If you haven’t sat down and had this talk with yourself or your significant other, it’s well past time to do so. Show them this post and tell them how tight we are and that you know I’m right. (Maybe even let them get a little jealous of the special rapport we have if you think it will motivate them to get on board.)
But goals aren’t enough. They’re an essential starting point – not an actual plan. They’re a destination, not a map.
Once you’ve got a pretty good idea of your short term hopes and your long term financial goals, it’s time to start stepping. Run when you can, walk when you must, and crawl when nothing else seems to be working.
You will not reach your goals by hoping or wishing, and you definitely won’t get anywhere by whining or wishing things were different than they are. They’re not. I’m sorry, but here we are. It doesn’t really matter whose fault anything is, other than learning whatever lessons we can learn from what has and hasn’t worked so far. What matters is what you do now – starting today – and what you keep doing moving forward. Clearly setting financial goals is part of that, but it’s not enough. Now it’s time to...
Establish a meaningful, workable personal or household budget
Get serious about paying down debt and cutting unnecessary expenses and wasteful habits
Start saving – TODAY – for emergencies, for future purchases, and for retirement.
That last one is where I almost heard some of you sigh or roll your eyes. (You didn’t know eye-rolling was something others could hear, did you? Well I can. It’s a kind of exasperating squishy-whooshy sound.) Sure, we’d all like to save money – but we’re barely keeping up paycheck to paycheck now. Besides, we have all that debt to pay down and all these different obligations. We’ll save eventually, sure, but... right NOW?
Yeah, right now. Whether it makes sense or not, let’s start saving today. The key to it all? Pay yourself first.
What Does It Mean To “Pay Yourself First”?
I’m so glad you asked.
How do you handle paydays in your world? I used to take the family out to eat and do a little shopping every payday while we could afford it, before I looked at that month’s bills and got all depressed. After the problems with that system became evident, I at least learned to prioritize stuff that was already behind or had the biggest late fees – still not a great system, but better than hitting the mall right away.
After going through credit counseling many years ago and gradually digging out of tens of thousands of dollars in debt, I learned to make and keep a meaningful budget, and prioritize my obligations. Even then, I had limited savings until someone challenged me on this point:
“If saving is so important to you, why isn’t it happening? If it were really a serious goal, you’d be doing something about it NOW instead of waiting for circumstances to change.”
I wasn’t happy with them, by the way. I found their comments presumptuous and judgmental and a bit rude and they can kiss my—
The problem was, as much as I didn’t love their approach, they weren’t entirely wrong. I’ve always been a big believer that our true priorities are revealed less by what we say and more by what we do.
If you want to know someone’s financial priorities, you don’t need to ask them about it – you need to look over their monthly spending habits. Period. The stuff you’re spending the most on? Those are your priorities.
Blaine, I hear you, but it’s not that simple! See, there are these yada yada factors and blah blah situation and excuses whining excuses rationalizing excuses defensiveness excuses!
I told you I was going to be annoying this time. Sorry. It’s intended in love.
Paying yourself first doesn’t mean you ignore your debt or toss your budget out the window. It means elevating savings and preparation up the list so that those things are truly priorities and not just wishes. It means prioritizing the things you say are your priorities. It means, well... it means that when it’s time to pay bills and manage expenses, you pay yourself first.
How Does “Pay Yourself First” Work?
Imagine if every time you sat down to pay your bills, you started by writing a small check to your own savings account. Even if it were only $25 per pay period, it would add up pretty quickly. That would be “paying yourself first.”
But of course, this is the 21st century. Many of us don’t actually sit down and pay all of our bills with stacks of envelopes, a check book, and a roll of stamps. Your mortgage payment might come out automatically. Your car payment might mean logging in to a website instead of making sure the address on the return slip is showing through the right window. So paying yourself first probably looks a little different as well.
Consider Auto-Pay
One way to pay yourself first is to set up an automatic transfer each time your paycheck is deposited from your checking account to your savings. The amount matters, but more important is the regularity with which it happens.
Obviously $100 per pay period will add up more quickly than $25, but $25 will still add up faster than you think. Even $10 per paycheck will add up way, WAY faster than, say... $0.
It’s also a symbolic gesture. A state of mind. A commitment. It says:
savings matter to me so I will make them happen one way or the other.
It’s a message to ourselves as much as anything. That may seem silly, but the messages we tell ourselves matter. “I can do this” produces a very different result than “here goes another failure.” “I lost two pounds this month!” sets us up for success, while “I’m still gross” leads to pity donuts and anger pizza. “I’m saving money TODAY” starts a track record of success for you to build on moving forward.
Give yourself a little credit – in this case, literally as well as figuratively.
Pay Yourself First With Technology
My favorite tech isn’t the stuff that gives me something completely new to do, but which makes something I want to do already easier and more productive.
I like my e-reader because of the access it gives me to books I might not have with me otherwise or which would be too bulky to bring to the barbershop and too much trouble to read in poor lighting.
I like texting because I don’t have to worry that someone might be at work or asleep, or that I’ll forget what I have to say before I have time to call.
My wife loves her fitness tracker not because it forces her to be active, but because it reminds her to be active like she already wants to do, and rewards her for being active with little messages and lights.
Imagine setting up an automatic transfer from each deposit into an online savings account, all with a few clicks or swipes on your phone or laptop.
You don’t even have to remember to do it. Every time a paycheck drops, $25 go into savings before you even see it. You don’t even have a chance to miss it. You can add a little extra when you get that tax refund or that birthday money from grandma (who still wraps it around a candy bar), but even if you don’t, it will keep accumulating in the background.
At the end of a year you’ll have an emergency savings account of at least $300. After a few years, you’ll have a decent down payment on the next car you buy or enough to pay cash for those emergency repairs on the kitchen.
Big Changes From a Little Change
Remember change jars? Maybe you still have one. In my house, the change jar is lottery ticket money. We never gamble with “real” money, but we’re fortunate to be in a position that we don’t rely on the $10 or so a month we bring home in dimes and quarters is necessary to keep the lights on.
So, every 3 – 4 months, we cash in the change jar and buy scratch off tickets for fun. Other people use change jars to eat out or do fun stuff. The only problem is, it’s harder and harder to find a bank that will “cash in” your change – and those horrible machines charge something like 10%!!
Change Becomes Savings
Here’s another cool thing technology can do – all according to your rules and wishes. Imagine if that same cool app you’re using to pay yourself first with automatic deposits into your savings each time you get paid could also round off your purchases to the nearest dollar automatically and throw the difference into that same savings account.
So you fill up the tank for $28.34 and pay with your phone... and the app pulls $29 from your checking account and deposits the extra 66 cents into savings. You stop for coffee and pay $4.11... now you’ve got another 89 cents into savings.
It doesn’t sound like much, but if you think about how many purchases you make in a given week, and figure an average of 50 cents each time, it adds up. Best of all, you don’t have to decide to do it each time. You can stop, start, increase, or decrease as you see fit – but once it’s set up, it does what you’ve decided automatically.
That’s even better than a change jar.
Pay Yourself First By Investing
If you’re already happy with your savings, you can use the same technology to help you start investing towards your next major purchase or to help prepare for retirement. There are multiple options out there for “micro-investing.” You can choose specific types of investments or simply choose the degree of risk you’re willing to take on and let the algorithms find the best options for you.
Keep in mind that you can always make changes yourself in whatever way you choose. You can add funds to what’s automatically being saved or invested, or decide to be more or less “hands on” about your choices. The technology is there to serve your choices, not to make them for you – unless you ask it to, which is also a choice. Your choice.
How Much Savings Is Enough?
That’s a big question with many answers, and one we’ve tackled here before. There are different ways to compute what you’re likely to need for retirement or the ideal down payment on a home, but for now I’m assuming that we’re starting small – that maybe we haven’t had a lot of success saving up until now.
Even having a few hundred dollars in reserve can make a huge difference when the unexpected occurs. Imagine you have a pipe burst in your home late one night. You call a plumber who tells you that just to come out and look will be $100, plus whatever repairs cost. It turns out to be a relatively easy fix, and you pay him $268, which empties your emergency savings.
But you had it. The pipes are fixed. Now, you start building up that same savings account again.
We Can Reach Your Financial Goals Together!
Now imagine that you don’t have the money, so you charge the visit on a credit card. You’re making barely more than the minimum payments each month, so that same $268 ends up costing you more than twice that by the time it’s actually paid off – IF it’s ever paid off. Or, worse, you have to keep the water off for several days until you can figure out how to pay for the repairs. That means buying bottled water to drink or cook with, or eating out more, all of which are expenses you really don’t have in the budget.
That’s the thing about savings and debt. The impacts – both positive and negative – tend to be much bigger than the obvious dollar amounts involved.
Pay Yourself First to Get Ahead
News outlets love doing those “how many Americans could afford an emergency?” stories. CNBC reported on the most recent of these for the year 2022:
56% of Americans can’t cover a $1,000 emergency expense with savings
The rest of the survey respondents indicated they would have to leverage themselves somehow to pay the $1,000 expense — 10% said they would borrow the money, 20% would charge it on a credit card, 12% would pay the bill and cut other expenses, and 4% would take out a personal loan.
Now, there are limits to how often we want to compare ourselves to others as a measure of success. In this case, however, I bring it up to point out that if you don’t have the savings you’d like, you’re not alone. You’re not a “failure” and you’re certainly not a bad person – at least not because of this. If you’re having trouble taking more effective control of your family finances, that only proves you’re an American in the 21st century.
On the other hand, if you start taking even small steps today to build up an emergency fund... if you keep your eyes out for our official announcement about what we’re unveiling next month... if you read just a few articles a week about making better use of your budget or shaving expenses in order to pay down debt... if you do any or all of these things, you’re literally in the top 44% of Americans.
Give Yourself Some Credit
Pay yourself first is about literally saving money, which will in turn literally improve your credit score and help you deal with debt. But it’s also about giving yourself a little credit mentally and emotionally, as a person.
Look at all you’ve survived. Look at all you’ve done, given what you’ve had to work with. Imagine what you could do with a little support and opportunity. So when you’re handing out thanks and compliments to people who’ve done you a solid, pay yourself first. You can do this.