Pay Yourself First
Paying yourself first is just what it sounds like. Basically, you pay yourself in the form of saving or investing before you pay anyone else. This includes all your bills and expenses except taxes, those are pretty important.
Traditionally, many people receive their income, pay taxes automatically, then pay fixed expenses such as rent, car loan payments, and any other variable expenses (the beer and pizza at 1:00 a.m.) and if anything is left they will save it. In a perfect world, this would work great. However, we live in a world far from perfect and this strategy rarely works. What often happens is the step between paying fixed expenses and the savings step grows to fit the available funds. We increase our spending and fool ourselves to believe that we can’t quite budget for any savings this go-around but will do better next month. The next month then brings on new opportunities for spending and the cycle continues. So how do we fix this?
What I am proposing by the statement “pay yourself first” is to rearrange the order of this cycle. Before making any payments I included above like rent, credit card bills, or even variable expenses, select a portion of your income to be drafted to another account out of immediate reach. This may be a savings account if you are trying to build up an emergency fund or an investment account if you are trying to invest for long-term goals. Either way, automate the process so you are not tempted to stray from it to purchase that new gadget you've had your eye on.
A few months ago, I heard my friend Jack explain it another way that made it very easy to understand. When you receive wages from an employer the government requires payroll taxes come out before you get your share of the money you worked so hard for. The government then uses this money to fund the social security program. In other words, they take a portion to provide for you during retirement. You should do the same on your own. Put aside an amount now to provide for yourself in the future.
Simply rearranging your budget to pay yourself first can set you on the path to financial independence. Don't keep putting it off until next month, start now! Set up an automatic draft that will pay you first.