Financial Fundamentals: Paying Yourself First

By Kelly Hodges
This month we’re getting back to basics and taking a look at some of personal finance’s most important fundamentals.  For people across all ends of the financial spectrum who are looking to improve their situation in 2012, “paying yourself first” is an important fundamental to help you achieve this.  And finding ways to save is where it’s at.  Whether your goal is to pay off debt, save up for a major purchase, fund retirement accounts, or expand your investment portfolio, treating these goals as a “bill” and allocating funds to them will allow you to reach these goals much sooner.

Unfortunately, most Americans lose site of this principle and have trouble systematically saving towards financial goals.  The typical pattern is to get a paycheck, pay the bills, buy some stuff, and then whatever happens to be left over at the end of the month gets used to fund the desired goal.  If there is nothing left at the end of a month, then the goal does not get funded.  It will take a long time to achieve anything using this method.

The funding of financial goals must instead be treated as a bill to be paid diligently each month.  The pattern must become: get a paycheck, send X amount of dollars directly to saving for the goal, pay the bills, buy some stuff.  Now obviously the math won’t add up unless there are some other changes to this equation.  One will need to either increase the amount of money coming in, or cut back on spending in other areas (or both) in order to have enough money to fund the goal.  One must also be able to stay focus on the long term goal (slow and steady wins the race) and be willing to make some sacrifices in the short term.  Finding ways to save like downgrading your cable service, or cutting back on your hobbies won’t hurt as much if it means being able to pay for your kids to go to college!

Each individual must determine what their own financial goals are and how much can be realistically allocated to funding them.  The key is to physically transfer that money out of the checking account and put it somewhere else where it can’t be spent.  The psychology also has to change, that this money is no longer “spending money,” but is instead “IRA money.”

Resolve to “pay yourself first” in 2012, or if you’re already doing so, strive to pay yourself more.  Creeping closer and closer to attaining that financial goal will make you so glad you did.

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Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of her employer or any other person or entity.

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