Pay Yourself First: Your New Money Mantra

couple using reverse budgeting to break paycheck to paycheck cycle

Do you catch yourself counting down the days until you get paid again, only for your paycheck to hit your account and disintegrate before your eyes?

You work hard for your money, but after paying bills and filling up your gas tank, you don’t have much – or anything – left over. Sound familiar?

Maybe you’ve even convinced yourself that once you get a salary increase, you’ll start putting money into savings. But when that raise came, you found yourself in the exact same spot you were before: paycheck comes in, pay bills, buy other necessities, and boom – it’s gone.

Many Americans find themselves in this cycle , and if you’re one of them, you should consider implementing the reverse budgeting method. Starting now can make a big difference later on, and we’re here to tell you exactly how to do it. Grab a pen and paper, let’s change the trajectory of your savings together.

What is Reverse Budgeting?

Reverse budgeting is a savings method built around paying yourself before you pay bills. Traditionally, you pay bills first and then see what you can save with what is ‘leftover,’ but the reverse budgeting strategy takes the first 10 percent (or more) of your paycheck and puts it towards savings. That means before paying any bills, you designate the first 10 percent of your earnings towards investing in yourself. This can include putting money into a savings account, retirement account, creating an emergency fund, or paying off existing debt.

How to Start Paying Yourself First

As with all things, you have to start somewhere; and if you have to start small, that’s okay too. Here are a few steps you can take today to set up your own reverse budgeting system.

Evaluate Your Spending

The reverse budgeting method will be most effective if you get an accurate analysis of your spending. Collect your bank and credit card statements and start tracking your expenses. You’ll need to divide up your spending into necessary and discretionary categories. For example, your housing payment, medicine, and groceries are all necessities. That daily Starbucks run, however, is not exactly a necessary expense.

Once you’ve divided up your expenses, you will get a better picture of where your disposable income is going. Maybe you’re eating out too often, spending too much on entertainment, or paying for too many memberships / subscriptions.

When saving is not a priority or a ‘mandatory’ expense, it becomes optional and can easily become dependent on other discretionary expenses. If you over-spend, you likely won’t save anything at all. By paying yourself first, you make saving a priority, just like rent or a car payment. When you treat saving like a mandatory bill to pay, rather than an option, you’re taking greater control of your long-term financial well-being.

Identify Your Financial Goals

By identifying financial goals, you give yourself a sense of purpose when saving money. Whether you’re saving for retirement, planning a wedding, or building up an emergency fund, setting short and long-term goals can give you a sense of accomplishment when they are reached.

After identifying goals, you can choose to contribute smaller amounts to each goal or focus on one or two until you meet your objective. Sara Raub, Branch Manager of SouthState’s Columbia Clemson Road location, recommends opening a few separate goal-oriented accounts. “It helps to nickname them as well, so you stay organized and on track,” says Raub. “For example, in addition to my primary checking account that I use for daily expenses and bills, I have an account named “vacation,” because if we don’t consistently save for it, then it won’t happen.”

Determine how much you need to save each month to achieve your goals in a timely manner; the 50/30/20 guideline can help identify how much you should be saving, but ultimately, it’s up to you to decide what’s feasible for your unique situation.

Automate Your Savings

Automating your savings is an easy way to streamline saving. When you contribute to your 401(k) each paycheck you never see the money, so you don’t miss it. This is also true with automating your savings.

If you automate your savings, you can set up a certain amount of money to be transferred to a savings account each time you get paid. Since you won’t see the money in your checking account, you don’t have to worry about spending it. Just make sure you set the auto-draft to come out the day after you get paid, so you aren’t tempted to spend it.

How Much of Your Paycheck Should Go Into Savings

While there isn’t a hard rule on how much of your paycheck should go into savings, there are guidelines that can help you determine how much makes sense for you.

According to the 50/30/20 method, you should put 20 percent of each paycheck into your savings account. This can include your retirement account, emergency fund, debt repayment, or general savings. If 20 percent isn’t feasible, that’s okay. Starting small is better than nothing.

Raub recommends starting with $20 a week. “If you transfer $20 every Friday to your savings account, you save $1,040 over the course of a year,” she says. “Small savings can really make a big difference over time.”

To open a savings account or for assistance with automating your finances, contact a banker or visit a location near you today.

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