“Thank you for your hard work today, Connor. I will see you tomorrow. Here are your tips,” my new boss said to me after my first day as a busboy at Outback Steakhouse. I quickly drove home to tell my parents how my day went and my plans for the money.
“Hey mom, dad, look! I made $25 at work today—only a few more days until I can get a new Xbox game!” I exclaimed. “Great job, Connor, but don’t forget to save some of that money. Pay yourself first.” my dad responded. Unfortunately, young, dumb Connor missed the subtle hint from his dad and took all of his newly acquired cash and stuffed it in the shoebox labeled “Fun Money”—and none of into the non-existent “Savings” shoebox.
Years later, I of course now know the importance of having a strong savings rate and paying myself first, but that came after a few years of spending every dollar that I came in touch with. Sadly, my dad’s sound advice fell on deaf ears, and it was only after I read the classic Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! (congrats if this is the one millionth time you have seen this book recommended!) that the “pay yourself first” concept finally clicked with me. But there is another concept I would like to share with you and that is paying yourself first and last!
What is Paying Yourself First?
First off, I want to first discuss the concept of paying yourself first. This just simply means taking a set amount or set percentage of the money you earn and stashing it away in your savings BEFORE budgeting for your bills and life expenses. This way, rather than hoping there is extra money at the end of the month to put into savings, you have taken care of savings as priority number one. Let’s be honest with ourselves: There is never anything left over at the end of the month in savings. That money is always spent on that extra happy hour, coffee, or impulse Amazon purchase (my old vice).
Related: 12 Reasons You’re Poor
Now, let me tackle the thought running through the heads of those new to the “pay yourself first” concept: “But I don’t have any room left to save.” For most people, this is just an excuse. There is always some amount of money in your budget that can be stowed away in savings—you’re just not willing to make a small sacrifice to your lifestyle. Start with setting aside a small amount in each paycheck. It could be as little as 5% or $50 dollars, anything to get started. In the classic book The Richest Man in Babylon, it is recommended to save 10% of your income. Now that the money is out of sight and out of your checking account, I promise you will not miss it or even notice it being gone! The goal, of course, is to work to increase that savings rate. Some people have a 50%+ savings rate! Don’t believe me? Start listening to the BiggerPockets Money Podcast and see for yourself.
How to Pay Yourself First
Now that the concept of paying yourself first has been properly established, let’s discuss how you should go about actually paying yourself first. The easiest and most powerful way to handle paying yourself first is to have a portion of your direct deposit from your employer go directly to your savings account. To set this up, just go to your HR department with routing and account number in hand and ask to add more than one deposit.
The next best way is to set up an automatic withdrawal for the day you get paid to go from your checking account to your savings account. This is simple and can be done from most mobile bank apps, but if you have trouble, just call up your bank directly.
The third and least effective way is to manually transfer money to your savings every time you get paid. This is the least effective way because it requires discipline. Just save yourself the headache and set up an automatic deposit. For those of you who get paid in cash, I suggest the envelope system. Define the amount or percentage you will save every time you get paid and stash that in an envelope and store it someplace safe. Once or twice a month, deposit that cash into a savings account.
Bonus: Use a savings account at a different bank than the bank you use for your everyday checking account. That way, you won’t be tempted to transfer money from your savings to your checking account for that “emergency” taco Tuesday trip. As for what bank to use, I suggest finding one that pays a high interest rate. I use Ally, and they pay 1.85% right now. Compared to .01% at most other banks, that is a LOT of extra money you earn in interest.
Related: 4 Steps to Buy the Car You Want Within the Budget You Can Afford
Pay Yourself Last
So, we have paying yourself first covered, and you are now taking steps to increase your savings rate so you can get that first house hack, invest more, or pay off those student loans. But you can kick things into high gear by also paying yourself last!
Your old method of savings was hoping there was some extra money at the end of the month and then saving that. Well, guess what? Now that you’re on a budget and taking your savings seriously, there may just be some of that money left over at the end of each month! So the day before your next paycheck, take that extra $10, $50—or, who knows, maybe even $100—and instead of taking yourself out to a nice dinner or buying your 28th pair of shoes, transfer that money straight into your savings account!
After some time. this becomes a game and you start to see how much you have left at the end of each pay period to save. Guess what? There is even an app to pay yourself last automatically called Digit. Digit tracks your spending habits, takes little chunks of money each day, and transfers that to a separate account. At the end of each week or month, you can look at the balance and send the money to savings, your IRA, to pay off debts, or even to help fund that bachelor or bachelorette party in Vegas! Digit is an easy way to automate paying yourself last.
What My Strategy Looks Like
Lastly, I wanted to share my strategy with you since it is slightly unorthodox, but it is basically completely automated. I manage all of the sales at BiggerPockets, so my income is often variable since I make commissions. I have designed my lifestyle to live off of my base salary, and all the commissions I earn are just gravy on top. I have a set dollar amount sent to my everyday checking account to live off of until my next paycheck. This money is for food, gas, and entertainment.
Then, I calculate all of my monthly fixed expenses, such as rent, insurance, car payment (my least favorite), student loans, etc., and divide that number in half. That dollar amount is then directly deposited into a different checking account. All of my bills are set automatic withdrawal from this checking account. This way, I never have to worry about paying them on time or having enough money to pay my car insurance after a night out on the town. It all happens automatically.
Next, my retirement savings are directly deposited into my accounts. And lastly, the rest of my paycheck is sent straight to my Ally savings account. I budget a solid amount for my savings on the weeks I don’t get commission payouts, but on the days I do get commission payouts, the amount sent to savings is significantly higher than normal. Of course, I add on paying myself last with the extra money in my everyday checking at the end of each pay period. I really like this method because I have the same budget for food, gas, and fun week to week, I never have to worry about paying bills on time, and my savings is automated with the added bonus of having a significant amount stashed to savings when those commission checks come in!
Alright, I know I just threw a lot of tips at you, but I think there are three actionable takeaways from this post:
- Create a budget and include savings as the first amount taken from your paycheck.
- Automate savings.
- Find a way to also save any leftover money you have at the end of the month, whether manually or with a tool like Digit.
As you can see, I have come a long way from that young, dumb Connor stuffing his shoebox full of cash to buy the newest video game, and I hope that this will help you become the financially savvy and secure person you deserve to be.
How do you automate savings?