10/25/12

Pay Yourself First

One of the first lessons I learned in personal finance was the principle of "paying yourself first." We all want to save ... for retirement; for a bigger house; for school; for safety; for a new toy.  The key to reaching these goals is the concept of "paying yourself first."  Before spending a dime, pull out your savings goals first.  Then live off whatever is left.  Pretend you never had it, or else you will spend it.

401K savings accounts act in this manner automatically.  The money comes out of your paycheck before you see it and goes into a retirement savings for you later. Automatic savings works the same way.  Ever since I started working, I have a certain amount automatically pull from my checking account at payroll time and go to a separate savings account. Automatic extra payments to debt act the same way, paying the debt off faster so your net worth is more.  When you do pay off the debt, shift those payments to savings and you won't even notice the pain.

Put raises into savings before you get used to the money (or at least half of them).
These are all common techniques for attaining financial security and freedom.

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