In this series for Money Smart Week, Everwise Credit Union is sharing tips on personal finance.
“Pay yourself first” is a catchphrase that means prioritizing personal savings above other expenses. Savings should not be an afterthought or an extra that only happens if there’s money left over at the end of the month. Putting aside money should be a fixed line on a budget that happens every month without fail.
Here’s how to successfully pay yourself first.
1. Review your budget.
Take a look at spending. A good model to use is the 50/30/20 budget — spending roughly 50% of after-tax income on necessities, no more than 30% on “wants,” and at least 20% into building savings or paying off debts.
2. Define short- and long-term goals.
Short-term savings, or funds to access in the near future, can be allocated to an emergency fund. Experts advise having three to six months’ worth of living expenses set aside in an emergency fund in case of a sudden, large expense and/or loss of employment. Long‑term goals can include retirement, a future home down payment, a new car, a career break, or other big‑ticket dreams that are several years away.
Narrow down short- and long-term goals until they’re realistic, then attach a number to each savings category.
3. Set timelines for each goal.
Now connect each goal to a time frame. Give first priority to the emergency fund, but don’t neglect your future; start saving for retirement today. This allows time to let compound interest work its magic.
Allocate the bulk of monthly savings to the emergency fund until that goal is met. Once the emergency fund is full, divide savings more evenly between short- and long-term savings
4. Figure out your monthly savings amounts.
Determine how much money to put into savings each month to reach financial goals by their deadlines. Take the total for each goal and divide it by the number of months in the timeline. For example, to have an emergency fund of $24,000 set up in four years’ time, divide $24,000 by 48 months to get $500 a month. This is the amount needed to set aside each month to reach that goal in time.
Don’t forget to account for any interest that will accrue in long-term savings. Also, remember to prioritize short-term savings for emergencies and adjust that savings allocation once the emergency fund is set up. Without an emergency fund savings can be depleted as soon as any unexpected expense crops up.
Celeste Jones is an Everwise Area Manager in Central Indiana.
The information provided is for educational purposes only. The views and opinions expressed are solely those of the author. This information should not be considered to constitute financial, tax, legal, or accounting advice or recommendations. Please consult with an attorney, financial or tax professional for guidance.
