If you're like many people, you want to save money for yourself, but when it comes time to set aside money from your paycheck, you find that there's nothing left over.
You've paid the rent, the bills, and the leisure. And that makes it impossible to save. So why not pay yourself first rather than last?
What does it mean to pay yourself first?
Paying yourself first means setting aside money for savings before you pay any of your bills or other expenses. In other words, the first "bill" you pay each month should be to yourself. This forces some discipline onto your spending. You may find that you have to rethink your money priorities.
You may have to do without some things, or at least change how you do them. Paying yourself is about making regular and consistent contributions toward some kind of goal, such as retirement. Although some might see it as a kind of deprivation, it is more about freeing yourself so you can afford other opportunities in life.
To pay yourself first is to make yourself more important than your bills. And it's not about being selfish—as your wealth grows, you will find yourself in a better position to help others.
Just how much can you build by paying yourself first? It varies. Here's an example: saving $20 a month and depositing it monthly for five years at 2% will yield about $1,262. Taking out $20 a month as a 28-year-old and putting it into an account earning 5% per year will grow to over $24,000 by age 65.
Can you afford to forego a few small luxuries a month for this? The point here is that putting away even small amounts will add up over time. The earlier you start, the more it will grow. Every little bit helps.
And you could increase your contributions as you grew older and more disciplined, and you could choose investments that grew much more than 5%.
How it relates to retirement
Paying yourself first is important to retirement planning because you will need to save regularly over the course of many years. You want to make it a habit. If your employer offers a retirement plan, you can enroll in it and contribute regularly; if it matches your contributions, that's like getting free money.
How to do it
The most painless way to pay yourself first is to set up an automatic savings program. You'll never know it's gone, and you'll adjust accordingly. Consider having regularly scheduled withdrawals made from an existing account (e.g., the checking account where your paycheck is deposited) and transferred into a retirement account.
Generally, any financial services institution that offers savings or investment accounts will offer an automatic savings plan. Most retirement accounts will have the option to link to your savings or checking account to withdraw funds regularly.
If you find that you can't make ends meet by paying yourself first, look for expenses you can cut or find ways to raise the needed money. An honest and thorough look at your spending should provide some clues.
Dive deeper: How to make the most of your paycheck
This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.
Read more information and tips in our Saving section