Budgeting is a cornerstone of financial health, even for the very wealthy, yet many struggle to find a method that truly works for them. One principle however has withstood the test of time: paying yourself first. This simple yet transformative approach involves prioritizing savings or investments before allocating funds to other expenses, and we mean literally before any other item, including food! In this article, we’ll delve into why paying yourself first is the number one budgeting tactic that everyone should adhere to.
1. Cultivating Financial Discipline
Paying yourself first instills a powerful sense of financial discipline. By making saving or investing a non-negotiable priority, you’re essentially training yourself to be more mindful of your spending habits. This discipline extends to all areas of your financial life, helping you avoid unnecessary expenses and stay on track towards your long-term goals.
2. Building a Financial Safety Net
Life is full of uncertainties, and having a financial safety net is crucial for weathering unexpected storms. When you pay yourself first, you’re establishing an emergency fund that can provide a cushion in times of need. This safety net grants you peace of mind, knowing that you have a financial buffer to fall back on, whether it’s for medical emergencies, unexpected job loss, or other unforeseen circumstances.
3. Harnessing the Power of Compound Interest
One of the most compelling reasons to pay yourself first is the opportunity to leverage the power of compound interest. When you consistently invest or save a portion of your income, your money has the potential to grow exponentially over time. This means that not only are you saving for the present, but you’re also setting yourself up for a more financially secure future.
For instance, let’s consider investing in the stock market. Historically, it has provided an average annual return of around 7-9%. By starting early and reinvesting your earnings, you allow your investments to compound, resulting in significant wealth accumulation over the long term.
4. Prioritizing Your Goals and Dreams
We all have dreams and aspirations, whether it’s buying a home, traveling the world, or retiring comfortably. Paying yourself first is a tangible way to prioritize these goals. By allocating a portion of your income towards savings or investments, you’re actively working towards turning your dreams into reality. This sense of purpose and direction can be a powerful motivator in your financial journey.
5. Reducing Financial Stress
Financial stress is a pervasive issue that can take a toll on both your mental and physical well-being. When you consistently pay yourself first, you’re taking proactive steps to alleviate this stress. Knowing that you have a solid financial foundation and a plan in place can provide a tremendous sense of relief, allowing you to focus on other aspects of your life without the constant worry about money.
6. Encouraging Mindful Spending
Paying yourself first doesn’t mean neglecting your current needs and desires. Instead, it encourages you to approach spending with greater mindfulness. When you’ve already set aside a portion of your income for savings or investments, you’re more likely to make conscious choices about how you allocate the rest of your funds. This can lead to a more balanced and intentional approach to spending. As just one example of dozens, with a fixed amount left to spend on food, utilities, and housing, choices for things like cable and other subscriptions are likely made much easier. Wasteful spending on things you end up never using are greatly reduced.
If you have never budgeted this way, it can be a jarring experience to automatically and most importantly first, deposit money into savings and investing accounts before any other expense. To help plan around how to do this, consider hiring a financial planner.
Many still are not aware there are thousands of financial planners that charge flat fees, hourly fees or project fees to create a financial plan that encompasses paying yourself first. And, the size of your investment portfolio is irrelevant to these planners, in fact, you can have no current portfolio to engage one of these professionals.