Have you ever opened your mailbox and found an overdue bill . . . from yourself?
How crazy would that be?! But think about it. After all, it seems perfectly natural to pay your mortgage, your utilities, your cell phone bill and everyone else first each month.
But why shouldn’t you demand some of your own money? Why shouldn’t you—the person who earned all that income—be able to lay claim to it before the rest of the world?
The Problem: How Most People Think About Saving
Here’s how the month usually goes, though: You get your paycheck. You pay for your needs, you pay for your wants and you stash what’s left over into a savings account. Except that amount ends up being tiny at best!
Psychological studies show that most people tend to be far too optimistic about two critical things:
- Their ability to stick to a budget; and
- The likelihood that they won’t experience a financial emergency.
In fact, a recent Bankrate survey says that a mere 41% of adults have the money in savings to pay for an unanticipated expense. That means 59% are crossing their fingers—hoping nothing bad ever happens and that they can continue to work until the day they die! It’s a recipe for disaster.
Have you heard of Parkinson’s Law? It states that work expands to fill the time available. Without conscious intervention, the same principle applies to your money. Your expenses expand to fill the amount of income you have.
That’s why—no matter how much you earn—your expenses find a way to eat up your entire income . . . if not more! So even if you get a raise or a big bonus, lifestyle creep sets in and introduces new bills to suck up that extra money.
The Critical Mindshift: Pay Yourself First
The amount of money you actually keep matters much more than the amount you make. And, without claiming your share of your own money upfront, what you wind up keeping is likely next to nothing.
Paying Yourself First is the first step in achieving Financial Freedom. You recognize your money belongs to . . . well, you! And you stop putting yourself at the bottom of the pile when prioritizing your expenses.
I know what you’re thinking. You don’t have the money to Pay Yourself First. You’re barely making ends meet as it is!
But Paying Yourself First is about more than money. It’s about a MindShift to making your family and your future your top priority. No one will do it for you! And it’s about creating a habit.
Scared to Pay Yourself First? Start small.
This month, as soon as your paycheck arrives, transfer 1% of that income to a separate account. And don’t touch that money! Then live on the 99% that remains.
This is a great time to distinguish which of your expenses are truly needs vs. which are simply wants on which you’ve been spending your extra cash. When you Pay Yourself First, spending starts to become a series of conscious choices instead of mindless actions that makes you wonder where all of your money has gone.
At the end of the month, take a look around. Did you survive the month? Be honest . . . did you even notice that 1% was missing from your disposable income?
Now that you’ve had some practice with Paying Yourself First, you’re ready to commit. Stretch yourself a bit in picking a percentage of your income that you’ll have automatically transferred to your PYF account each and every month.
Watch as your PYF account balance increases throughout the year and know you’re investing in your family and in your future self!
What’s holding you back from Paying Yourself First? How would Paying Yourself First change your journey to Financial Freedom? Share with us in the Financial Foundations community!
image credit: Bigstock/Maridav
Dr. Tony is the co-founder of MindShift.money and the best-selling author of three books on personal and business finances. Having achieved Financial Freedom at 27, Dr. Tony believes that through Financially Fit Bootcamp and Cash Flow Cure everyone can get there. He has made it his life’s mission to help others live a life where their money works for them—not the other way around.