The Money 101

Personal finance basics to build wealth

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Start Saving Immediately

Throughout the world of personal finance, one of the most common pieces of advice is to pay yourself first. It is very old advice, and yet it still holds true to this day. What this phrase really means is pay your future self by putting money into savings before paying any other expenses.
Since almost all financial advisors and blogs suggest paying yourself first, we know that it has to be important. But why?

What is the purpose?
We have to have a reason for setting aside a portion of our hard earned money rather than spending it as we please. The goal is to start saving for large expenses and building reserves for unanticipated situations. Retirement, education, vehicles and a home are some of those large expenses that can usually be anticipated well before incurring the cost. And it takes time to save enough to be able to afford these items, even when using a loan to do so. Cars breaking down, medical emergencies and loss of employment can crop up in an instant and wipe you out financially if you are not prepared.

With reserves built up and savings at the top of our list, we can be prepared for these expenses whether anticipated or not. I promise you that the peace of mind will be well worth putting off some of those impulse purchases. Just imagine having a decent amount of fall-back savings sitting in the bank in case anything were to come up unexpectedly. Paying yourself first is a way to de-stress your life and reduce your worries or fears.

How much should you pay yourself?
So this all begs the question of how much money to set aside. The true response would be that you should set aside as much as you are comfortably able to. Set aside as much as possible while still being able to cover your other expenses (and still being able to treat yourself every now and again).

A general rule of thumb is to pay yourself 10% first.
However, if you are not able to afford putting away 10% right now, that is o.k. But do not let the excuse that you cannot afford to save stop you from putting something away. Start today. Start right now. Even if it is only $100 a month. Every little bit helps and will eventually get you to improved financial stability.
Why is it so smart?
This will set money aside before anything else has a chance to take over your bank account. Putting it off until later means you will likely find other ways to spend the money. That fancy new tv, eating out every night, a clothes shopping spree, the bottomless pit that is home improvement... It is much more tangible to focus on the immediate gratification of impulse buying than saving the money for the somewhat ethereal idea of your future self. Note that this is also what makes debt such a tantalizing prospect: make your future self pay (and at a price premium no less) so that you can enjoy it now. Because it is so easy to discount your future, setting some aside immediately upon getting paid will make it so much easier to play with the end goal in sight.

Where you put the money that you save is another beast all together. There are a variety of savings vehicles that will help put your money to work for you. You can look forward to some future posts that address this. For now just make sure that the savings are put somewhere that is a little more difficult to access. Even a simple barrier to access can be effective, i.e. putting it into a savings account instead of checking.

It is best to have at least 6 - 12 months worth of living expenses set aside as cash savings. This can be at the bank and does not have to be rolled up and hidden inside your mattress. It just needs to be easily accessible, or what is known as a liquid asset.

After you have enough funds set aside to cover emergency living expenses, the money you continue to set aside each month can go into other types of saving vehicles. CD's, bonds, 401K's, real estate... there are a lot of places where this money can be saved and put to work earning you more money. As I said before, there are too many to be covered in this article. Know that you just need to keep setting money aside to be there for emergencies and to prepare for big expenses and retirement.

Start right now. Go into your bank's mobile app and transfer $100 from checking into savings. Go ahead, I'll wait.

Great! Don't you feel better already? Keep it up and your money will be able to take on whatever comes your way. 

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