Why You Should Pay Yourself First
As a financial advisor, I see this all the time, Millennials and Gen Z’s securing well-paying jobs after graduating from college. This is all well and good, but far too many times, young professionals, like yourself, fail to understand the importance of paying yourself first and how it can pay dividends down the road.
Everyone’s situation is going to be a little different, but that doesn’t change the most critical principle to responsible wealth planning, paying yourself first. The first “bill” you should pay each month should be to yourself. You should pay this hypothetical “bill” before your rent, groceries, or any other expenses. Young professionals, like yourself, often struggle with this concept because there are so many things like the newest pair of Air Pods, Jordans, or a new car that you’d rather spend your newfound wealth on.
Once you begin paying yourself first, it will become a priority in your mind every time that direct deposit hits your bank account. As you see the balance in your account continue to grow every month, you’ll gain a sense of security and accomplishment, making you want to save and chase that feeling even more. Understanding this basic principle of paying yourself first while you’re young will set you down a path for tremendous financial success in the future.
How to Pay Yourself First
There is never a bad time to begin investing in your financial future, the sooner, the better. A good place to start is with a Savings Account, IRA, Roth IRA, or an Employer 401(K) program.
The easiest way to ensure you are paying yourself first is to set up automatic transfers from your bank account each time you get paid, so you don’t forget or skip on saving for a particular pay period. This strategy is highly effective because it removes the temptation to skip on saving because the money was already placed into your account before you even knew you had it. As time passes, you’ll see your investment continue to grow - see the next section to see how a small investment each month can grow into a large amount over time.
Another strategy is to have your paycheck deposited into your savings account rather than your checking. Now when you need to pay your expenses, you can manually or auto-transfer money into your checking account to cover those expenses. This strategy takes away half the battle of saving, actually putting it into your savings account. If you want to be an overachiever, you can open your savings and checking accounts at different banks. You’ll have to jump through multiple hoops to raid your savings for that Gucci belt you’re just dying to have, and maybe you’ll rethink your decision if you can’t access those funds with the push of a button.
Savings Example
Suppose you’re fresh out of school, 22 years old, and you land a job making $40,000 a year after taxes. If you save just $100 per month or 3% of your monthly income, and you assume a 4% annual compounding return on your investment, you would accumulate: $14,724 after 10 years, $24,609 after 15 years, and $36,677 after 20 years.
Final Thoughts
Now I don’t want you to think you shouldn’t spend any of the money you work hard for, where’s the fun in that? Just be smart - enjoy your youth, work hard, and treat yourself when needed, we all deserve it. That being said, don’t forget how important it is to pay yourself first. It will pay off immensely 30+ years down the line, and you’ll be glad you put yourself before anything else.
If you want assistance planning for your financial future or have any questions related to paying yourself first or any other financial topic, call me at 862-702-3500 to set up a free, no-obligation consultation to discuss how I can help you put together the pieces of your financial puzzle.
**Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Sources
Forbes: 7/24/14 The Money Habit That Can Boost Wealth
Investopedia: Pay Yourself First 11/18/19
Wells Fargo Website: Paying Yourself First
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