Pay yourself first

Most people never forget to pay their taxes. Most people pay their taxes without ever thinking about it. The government has a system that makes it very easy for most people to pay very close to the right amount of taxes, and able to afford it every month. It is not a conspiracy theory; it’s payroll deductions. The government’s main concern is that taxes get paid on time and in full. They have found a way that works very well. In saving money for your own future, there’s no need to reinvent the system. You can simply use a system that is the same as, or very similar to, payroll deductions.

Your employer may offer a pension plan. If they offer a matching contribution, you are especially fortunate. Either way, having your employer withhold a certain sum each month makes it automatic. Without thinking about it, you’re progressing toward your goal.

If your pension contributions aren’t large enough to reach your goal or if your employer doesn’t offer pension savings, you can probably have an amount withdrawn from your bank account each month. You can do this the same day, or a day after, your paycheque is deposited. In this way, the savings is automatic and you don’t even notice it. In my experience, I have found that many people spend all their money every month. If they have more money, they spend it all. If they have less, they simply spend less.

There are two major benefits to paying yourself first. One is that you accumulate funds over time. This could be your emergency fund, then your retirement fund. On top of that, it causes you to spend less. The less you spend, the smaller the amount you need for an emergency fund and for a retirement fund. Saving money each month gets you closer to your goal in both these ways.

You can use this same idea in other ways. You could set up automatic repayments of your debt. Whether this means increasing your credit card payments or setting up pre-authorised debits for a line of purchase, this may be one way to meet your debt reduction goals. Personally, I have set up automatic debit for the full balance of my credit card each month. I review the purchases, but I never have to worry about getting the payment in on time. This does require me to always be sure I have enough money in my bank account. Many people set up their mortgage payments to match their paycheques, eg. every two weeks or twice a month. Some people save thousands in interest by increasing their mortgage payments by just a few dollars.

After your emergency fund is built up, you could have your monthly amount deposited to your investment account instead. You can either buy investments regularly, or allow the balance to increase as you do research to find a bargain.

If you are making car payments, you know how easy it is to adapt to a monthly commitment. When your car payments end, it would be very easy to re-direct your cashflow to savings. The same could be done when your mortgage is paid off. Not only will that help you build up your assets, it will also keep your spending under control.