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Pay Yourself

Learn about a budgeting technique that puts your savings first.

Pay yourself first—it sounds like backward logic in budgeting, doesn’t it? You focus on your saving first; expenses come second. But how can you do this? How can you focus on your savings when you have fixed and variable expenses every month that you need to pay?

We’ll get to that. But first, let’s talk about why it’s important to have savings. According to a Bankrate survey, only 23% of Americans have enough emergency savings to cover six months of expenses, the typical amount recommended by experts. Right now, as a student, your basic expenses are small. Getting to that six-month threshold is low (and certainly lower than it will be after graduation).woman in laptop

Saving Is Important

There will come a time when you need to dip into your savings to get by—maybe for a week, or a month, or more. If you only save what’s left over from your paycheck at the end of the month, you’ll usually find there isn’t much there. Paying yourself first flips that, making sure you save some and then pay bills and other expenses with what’s left.

Getting Started

To get started, look at your monthly expenses. Compare that to your monthly income and then see what is left over. If you want to regularly save more than that, cut down on your variable expenses (entertainment, food, gas, etc.). Once you’ve decided on an amount that you want to save, do it! Take that amount each month and move it right into savings.

It seems simple, but it can take a lot of practice. It requires a change in mindset. When you pay yourself first, you’re telling yourself that your potential future needs are more important than current expenses. That can take a lot of convincing because there’s a lot of marketing and influence out there telling us the things we want right now are most important. But it doesn’t have to be that way.

Being Prepared

When you are prepared for an emergency, they become a lot less of a problem and less stressful. Think of it this way: if you’re out hiking and and sprain your ankle and you don’t have a first-aid kit and never learned how to address a sprain, that ankle injury could become a matter of life and death. But if you have a good first-aid kit and know how to use it, you can bandage and brace the injury. The problem is mitigated quickly. The injury is still a problem—you’ll be moving slower—but you can move.

It works the same way for financial emergencies. A blown transmission or a speeding ticket are things no one wants to pay for, but if you’ve saved and have a financial first-aid kit, the emergency doesn’t make you choose between rent and paying for the emergency.

Tips and Tricks

There are a few tips and tricks to get you started paying yourself first.

  • Open a high-interest savings account. You hopefully already have one with your credit union. If not, or it’s not a great rate, ask about your options.
  • Put any extra money you earn or get into that account. If you put your money right into your savings account, you don’t have to worry about saving what’s left in your spending account. You run a thinner margin on your spending account, but your savings are already locked in.
  • Set up regular transfers.

Reassess Your Goals

Every so often, reevaluate your savings goals. Maybe after a few months, you have a decent amount saved up, so you can keep more in your checking account. Or you can set up a second savings account for a specific purpose, like a vacation.

No matter what your end goals are, saving is important. Focus on making sure you’re taken care of and that you’re safe in case of a financial emergency.