5 Excuses For Not Paying Yourself First -- And Why They're Wrong
This common piece of financial advice is easily followed when you stick to a budget.
The global pandemic has forced many people to reconsider their views and approaches to managing and acquiring money. Whether based in fear, curiosity or opportunity, people are turning to different forms of investing as a means to offset the impact of the global health crisis.
A common piece of financial advice for first-time investors is to "pay yourself first" as a precursor to investing. But if it's common wisdom, why don't more people do it? Here are five reasons people say they don't pay themselves first — and what you can do to remedy it for yourself.
1. You don't make enough money
The number one rebuttal I get to the suggestion to pay yourself first is that the individual doesn't make enough money. I believe there is certainly a reality to that, but in many cases it's simply not true — but the individuals aren't aware of it because they don't follow a budget. Studies show that only about one-third of Americans prepare a detailed budget, which at a basic level tells you what's coming in as income and what's going out as expenses. Without this tool in place, it's easy to lose sight of spending patterns that aren't favorable to your ideal saving and investing strategy. The good news is, the fix is pretty simple: Create a budget. Make it as brief or as detailed as you want, as long as you have a good idea of what your monthly expenses are compared to your monthly income. Perhaps there's an opportunity to eliminate certain expenses you pay but have forgotten about, or to limit expenses you overspend on. Whichever direction you take, a budget is a solid starting point.
2. You don't understand the financial impact
What difference does it make if you pay yourself first? Or second? Or last? As long as you're saving, it shouldn't matter when you save, right? Unfortunately, this is not correct. It's much better to spend what's left after saving rather than saving what's left over after spending. Paying yourself last signals to your brain that maintaining discipline is not a priority, and you are apt to keep following this broken pattern. Paying yourself first is something you will get around to if you have time, but not something you are committed to. But when you choose to pay yourself first, you are demonstrating that your greatest financial priority is your financial future.
3. You don't know how
Although it sounds simple enough, paying yourself first can sometimes become a complicated concept. How much do you save? Is there an ideal percentage? What do you do with the money once it's saved? The answer is just to start somewhere, anywhere, and build from there. If you have a fixed income, each pay period you might calculate a number (say, 10 percent to start) and set it aside. With a fluctuating income, you might make an on-the-spot assessment of how much 10 percent of that week's check is and set that aside. This is where having a sound understanding of your income and expenses via budgeting can really help out.
4. You don't have the discipline
Let's face it: A major part of financial success depends on doing things that take time and aren't fun in the least. Between budgeting, saving and investing, personal financial management can be tedious. Thankfully, there are plenty of tools that can help alleviate some of the budgeting burden, including Mint and EveryDollar. But to start with, I recommend automating your savings. There are several ways to do this, but my favorite is to split a direct deposit across multiple accounts. This allows for me to wake up and have my payment to myself already where it needs to be. No excuses for me to overlook or forget to do it, and typically they can be set by dollar amount or percentage.
5. You don't have to
All of the high-income earners in the room, please stand up. You make so much money, you always have some left over. You don't have to worry about budgeting, saving or sacrificing because you're making the big bucks! That is, until you're faced with a layoff and you have to dip into the funds you put aside — but didn't put aside with a plan for your future. Your 401(k) becomes your bank account, and soon you are panicking because it's running out. Things do happen, and it's better to prepare for an uncertain future than to wing it and hope that nothing bad ever happens. High-income earners are in the best position to stick to a budget, pay themselves first and invest. Take advantage!
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