Here’s an obvious yet terrifying fact: Nobody’s going to save money for you. So, if you’re not willing to save then you’re kind of shit outta luck with no one to blame (besides yourself). The government may be saving money for you too, but who really wants to rely on that?
While it doesn’t hurt to wish that you had a few extra zeros in your bank account, wishing won’t actually make the zeros appear. A magic genie might, but I wouldn’t hold my breath.
It’s all up to you, and it looks like you’ve decided to save, and that’s great! Yay, I’m so happy for you. Alright that’s enough of a congratulations, because you haven’t actually done anything yet. I hesitate to offer a sincere congratulation because so many people faulter on their goals. If you’re going to be in the Moneyseed camp you have to start packing a little bit of stick-to-it-ivenss or you’re going to be in the same situation you’re in now. For those that have started saving already, kudos.
I’ve cracked the surface on how to save money, but now it’s time to explain what it means to “pay yourself first”. It’s a really simple concept really. Basically you should just treat your monthly savings like it’s a bill.
You know that you have fixed monthly expenses that you wouldn’t even think about not paying ie., mortgage, student loans, cell phone service. Why shouldn’t savings become a fixed expense as well? If you didn’t pay your mortgage you’d get hit with a huge interest charge, right? Well if you skimp on your savings you’ll get hit with another form of interest charge: No interest (and I’m talking about the good kind)!!
You should already have an idea of the exact amount you make after-tax every month and the frequency of your paychecks. This will help you in setting a realistic goal for yourself. It isn’t realistic to say “I’m gonna save $10,000 this month” when you only make $3,000. It just wouldn’t make sense, unless you’re doing some crazy math I’ve never heard of.
When you know the amount you earn, and you want to pay yourself first, you can then decide whether you want to save a percentage of your income, or a fixed amount. For example if you make $2,000 every month, you could “pay yourself” 5% of that money into a savings account which means you’ll have $100 unspent. Alternatively, you could have just said “I want to save $100 a month” regardless of what the actual percentage is. I would recommend saving as much as you can, but not too much if you’re just starting. If you’re just overcoming a shopping addiction, you should be taking baby steps or you’ll end up back in the mall carrying bags from a myriad stores.
Make sure to set a goal for your savings. Saving just to save is stupid. I personally save for retirement, emergencies, vehicles, appliances, home purchases, etc. I know why I’m saving. I don’t care why you’re saving, but you should. Having a mental image of what your end result will be will keep you on track and not make that saved money look so pointless.
Johnny, wouldn’t it make sense to pay yourself at the end of the month instead, since you don’t know what your other monthly expenses are going to be? Short answer: No. The long answer is still no but here’s the reasoning behind my reasoning: If you pay yourself first, you’re set, the money is saved and you can wipe your hands clean. You can go ahead with the rest of your month knowing exactly what your bank account looks like and you can know that you’ve already achieved your savings goal. If you misfire, and you spend too much then oops you have to either cut back or you have to set a more reasonable goal for yourself.
If you were to pay yourself at the end of the month instead, you’ll pretty much always find that you spent too much throughout the month. You’ll have scraps left, because you nickle-and-dimed yourself like so many people do. I can attest to this, because for a while I was paying myself at the end of the month with whatever was left and it was always dismal compared to what I was anticipating.
Give yourself a high-five if you pay yourself first, or if you’re going to start now. And guess what? If you’ve already achieved your savings goal for the month, the rest of the money in your checking account is yours to spend (after paying your bills of course). For now anyway. We’ll try to cut back the money you spend on random crap and refocus it toward the things you actually care about in the next post of this series.