You’ve heard the phrase but what exactly does it mean? “Pay yourself first” means that before paying the rent, utilities, groceries and all other those other bills, you put money into some kind of savings account, insurance plan or debt reduction instead. This simple strategy forces you to cut back costs elsewhere so that saving money becomes the priority.
My husband and I have been “paying ourselves first” for these past 25 years. Here are the 8 ways we make it work for us.
Divert funds into a retirement plan
My husband’s employer offers one of the most solid retirement plans in the US. Since his first day on the job, 10% of his income has gone directly into this fund which has been steadily growing in value despite a rough economy.
Pay into an 401k
His employer also offers a 401k savings plan. We’ve been contributing about 5% of his yearly income into this fund as well.
Pay into an IRA
Since I’m a work-at-home Mom without any kind of retirement plan except for Social Security, I funnel about 20% of my yearly income into a spousal IRA.
Pay into health insurance
Even though our health insurance premiums run us about 5% of our annual income, we always felt it was a good hedge against catastrophic medical bills. Along with covering 90% of all our medical bills, having health insurance means that we can afford to have regular checkups and screenings which saves us money in the long run.
Pay into a life insurance fund
We also have life insurance policies for the both of us in case something were to happen. The policies are large enough to pay off all our debt while still leaving the surviving spouse with enough to live on.
Feed the emergency fund
Emergencies do happen but instead of charging them on the credit card, we pay them out of our emergency fund instead. Whenever we dip into this fund, we try to replenish it as quickly as possible.
Feed the discretionary savings account
Unlike the emergency fund, this account is used for things like home improvement materials, new appliances, computers, vacations or other large items. This account is maintained with unearned income, Christmas & birthday money, refunds, and bonuses.
Pay down debt
While many people don’t think of this as a “pay yourself first” strategy, paying down existing debt is a great way to free up your cash flow which can then be used to accelerate a saving plan as well.
Making these 8 expenses the priority in our spending habits has forced us into living on what’s left of our monthly paychecks. While this savings strategy was tough to do in the early years of our marriage, it’s now second nature for us and doesn’t seem like much of a sacrifice at all.
More by this contributor:
How a savings account has benefited our family
Scrounging our way to savings
Investing in silver on a budget.
