The Power of Paying Yourself First

Making your savings a priority can totally change your financial game. The idea of "paying yourself first" means putting your savings at the top of your financial priorities, ensuring you build wealth consistently. Here’s a fresh approach to mastering this crucial habit, complete with practical steps and real-world examples tailored for you.

Examine Your Spending Patterns

First, take a close look at your spending habits. If you already have a budget, review all your expenses, including non-essential spending. If not, track your expenses for a few months to understand where your money goes. Tools like Mint or YNAB can simplify this process and provide insights into your spending habits.

Example: If you discover that you're spending $300 a month on dining out and $150 on subscriptions, you might decide to cut these expenses in half, freeing up $225 monthly for savings.

Set Clear Savings Objectives

• Short-Term Savings Goals

Short-term savings are funds you might need to access in the near future. This often includes an emergency fund. Financial experts recommend setting aside three to six months’ worth of living expenses in an emergency fund to cover unexpected expenses or job loss. Additionally, consider a rainy-day fund or slush fund for flexible spending on spontaneous activities or large discretionary purchases, such as a vacation or a new gadget.

Example: If your monthly expenses are $3,000, aim to save $9,000 to $18,000 for your emergency fund. You might also set a goal of $2,000 for a rainy-day fund.

• Long-Term Savings Goals

Long-term savings involve money you can leave untouched for several years. These goals might include saving for retirement, a home down payment, a new car, or taking a sabbatical. One way to grow these savings with minimal risk is through a Certificate of Deposit (CD). Whether you choose a short-term or long-term CD, it's an effective method to let your money grow securely. Our CDs offer attractive rates, oftentimes at a higher rate than a bank would offer.

Example: If you plan to buy a car worth $25,000 in five years, start saving $416.67 monthly ($25,000 ÷ 60 months).

• Setting Clear Goals

To create a realistic savings plan, categorize your short-term and long-term goals and assign specific amounts to each. This approach will give you a clear picture of how much you need to save for each objective.

Develop a Savings Timeline

With your savings target in mind, it's time to establish a realistic timeline to achieve your goals. Prioritize building your emergency fund first, but don’t overlook the importance of starting your retirement savings now to take advantage of compound interest. Initially, you might want to direct the majority of your monthly savings to your emergency fund until it reaches your desired amount. After that, you can balance your contributions between short-term and long-term savings goals.

During this process, consider consulting with your HR representative or accountant to explore retirement savings options like 401k, IRA, or other plans. This can help you make informed decisions and optimize your savings strategy.

Example: If you aim to save $18,000 for an emergency fund in three years, you need to save $500 each month ($18,000 ÷ 36 months). Once you reach this goal, redistribute your savings towards other objectives, like retirement or a home down payment.

Calculate Monthly Savings Amounts

Now it’s time to figure out the monthly amount you need to save to meet your goals by their deadlines. Start by taking the total amount for each goal and dividing it by the number of months in your timeline. For instance, if you aim to save $24,000 for an emergency fund in four years, divide $24,000 by 48 months, resulting in $500 per month. This is the amount you’ll need to save each month to stay on track. Apply this calculation to each of your goals.

As you go through this step, remember to factor in any interest your long-term savings might earn. Prioritize your short-term savings for emergencies first and adjust your savings plan accordingly once your emergency fund is fully funded. Without an emergency fund, unexpected expenses could quickly drain your savings.

• Emergency Fund:  To save $15,000 in three years, you need $417 per month ($15,000 ÷ 36 months).
• Home Down Payment: To gather $30,000 in five years, save $500 per month ($30,000 ÷ 60 months).
• Retirement: To accumulate $200,000 over 20 years, assuming a 5% annual return, save about $650 per month.

Example: If you want to save $12,000 for an emergency fund in two years, you need to save $500 monthly ($12,000 ÷ 24 months). For a $40,000 down payment in five years, save $666.67 monthly ($40,000 ÷ 60 months).

Automate Your Savings

Automate your savings to ensure consistency. Set up automatic monthly transfers from your checking account to your savings account. This method treats your savings like a non-negotiable expense, ensuring you never miss a contribution.

Example: If your monthly income is $4,500, set up an automatic transfer of $450 (10% of your income) to your savings account each month.

Regularly Review and Adjust

Your savings plan should evolve with your life. Periodically review your strategy and make adjustments as needed. If you find yourself short on funds, look for ways to reduce discretionary spending or increase your income before cutting back on savings.

Example: If you get a raise and your monthly income increases by $500, increase your savings contribution proportionally. Alternatively, if you have unexpected medical expenses, temporarily reduce your savings until you recover financially.

By adopting the strategy of paying yourself first, you’re making a crucial investment in your financial future. By examining your spending, setting clear goals, automating your savings, and regularly reviewing your plan, you can build a solid foundation for long-term financial success. Start today and secure your tomorrow!

* APY (Annual Percentage Yield) is the actual effective annual yield after the compounding of interest/dividends