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Financial freedom

The #1 Thing You Need to Do If You Want Financial Freedom

Most of us desire financial freedom, but saving to get there can seem daunting or often impossible–especially when life events keep getting in the way of our intentions to save. 

There is one thing that you can do today to turn around your situation and quickly get on the path to financial freedom…pay yourself first

This golden rule is the first step to ending a month-to month financial existence and the best way to build security and significant wealth over time. 

Why? Because you become a priority. Your financial future becomes a priority. 

All it takes is a little planning, dedication, and discipline. 

Read on to find out the importance of this strategy and how to get started today.

 

What It Means to Pay Yourself First

Pay Yourself First

Contrary to what the phrase implies, ”pay yourself first” refers to how you save money, not earn it.

Simply put, it means you pay into your savings and retirement accounts before you do anything else–pay rent and utilities, upgrade your smartphone, buy new shoes, or order takeout on a Friday night. 

 

Why It’s So Important

You may think you don’t have enough money to save. After paying for everything else–rent, groceries, utilities–there seems to be no money left for retirement, investment, or an emergency fund

Perhaps you can tuck a little something away with your next paycheck. 

But, chances are, you don’t, and so the cycle goes.

A recent Bankrate survey shares that the majority of Americans—as many as 60%—don’t have enough money saved up to pay for a $1,000 expense if it came up at the last minute. 

This means that they don’t have enough for future expenses or luxuries as well. 

It doesn’t have to be this way. 

Personal finance advice says the best way to break this cycle is to heed the golden rule: pay yourself first

Whether you’re putting money into a savings or retirement account (or both), this approach allows you to prioritize your future.

The strategy is simple. Treat your savings like a bill. Make savings the most important “bill” that you pay…and pay it first.

By doing this, there is an increase in the potential of saving a substantial amount.

Saving money moves from something you wish to do into something you need to do. Paying into a retirement or emergency fund becomes a monthly necessity. 

This habit alone will help you make big strides towards financial freedom. 

Along with building a satisfying savings balance, benefits to paying yourself include… 

  • Having means to pay for planned larger purchases (kitchen renovation, vacation trip, college fund for your kid).
  • Avoiding going into debt in case of an emergency.
  • Enjoying peace of mind knowing that money is there when needed.

 

How Much You Should Save Each Month

Creating personal savings is a mindset. savings

If you think of it as the monthly first bill you must pay, you can really build towards wealth over time.

It’s important to have a set amount to pay yourself. Pinpoint a realistic amount that doesn’t feel overwhelming.

Start with a small amount like $50 or $100 each payday. If you’re saving for retirement and your employer offers a 401(k), the automatic payroll deductions will probably go unnoticed after a few months. 

If you have an IRA (Individual Retirement Account), set it up to automatically withdraw each month when you get paid. 

It is advisable to aim for saving 10% of your income as a minimum payment towards retirement. 

If you can do more, great! The more saved, the further along you’ll be on your path to achieving financial freedom. 

If you’re specifically saving for an emergency fund the formula is different. You should ideally plan 6 months’ worth of your living expenses. That way, if something happens, you’re covered. 

We recommend sitting down and figuring out how much you need for 6 months. Then, see how much you can contribute each time you get paid.  

 

Budget Your Savings

budgetA precursor to paying yourself first is to budget your savings

Don’t make saving an afterthought. This is what keeps you in the paycheck to paycheck cycle. 

You need to plan for success in order to meet your money goals. It’s as simple as that. 

Begin by making a list of your short-term and long-term savings goals. 

Top priorities include saving for retirement and building an emergency fund. Other goals can follow such as travel, new appliances, or a house.

Decide whether you want to contribute a small amount to each goal or pick a couple to focus on first. Sit with the numbers. 

Figure out how much you need to save to reach those goals and how much you can afford to put away monthly.

If you have unnecessary expenses you can cut like your Netflix subscription or gym membership to meet your goals, do it. 

Let’s say you are able to cut $40 each month in subscriptions. $40 x 12 months is an extra $480 each year you can easily contribute towards being financially free. 

 

Make Paying Yourself First a No Brainer

Setting aside a portion of your income for savings can take some practice, especially if you’re used to having nothing left after your bills are paid. 

Some helpful tips to pay yourself first include…

# 1 Set up an auto draft. Saving is a struggle for most people. It requires practice and commitment. Instead of waiting for saving to feel like second nature, make automating your friend. 

Before your paycheck hits your bank account, pay yourself first through automatic payroll deductions. This “set it and forget it” is an easy and pain-free approach to saving. Your allocated money is redirected to a 401K, IRA, savings account, or other investment right away.

The main reason this works is that you can’t spend your money if you’ve already saved it. Having it happen immediately helps limit spending the money in other ways.

#2 Save in a bank that is not at the bank with your checking account. A great way to build a nest egg is to open a savings account. Opening one where you have a checking account has the advantage of making transfers and deposits easy. However, saving in a different bank can be more beneficial in the long run. 

Putting a physical barrier between your saving and spending money creates a mental boundary, too. Out of sight, out of mind. There is less temptation to use the money you are saving if it’s not visible when you log into your checking account. 

#3 Open a high-yield account for your emergency fund. A high-yield savings account earns much higher interest than a standard savings account. Interest rates generally start at 1.5% and go up to 3.5%. 

A high-yield savings account is federally insured up to $250,000, so it’s safe. You can access your cash quickly when needed, whether through withdrawal or funds transfer.

Look into online banks for high-yield account options. These tend to offer higher interest rates than brick-and-mortar banks.

#4 Stick to the plan and avoid decreasing the amount you contribute. Financial discipline builds as you pay yourself first on a regular basis. When you contribute a fixed amount of money to a savings or retirement account monthly, you create a financially freeing practice. 

As with all habits, saving becomes easier over time. Resist the urge to decrease your amount, hoping you will make it up the following month. This break in habit can be costly as it tends to snowball into risky financial behavior. 

Remember, once you develop a routine, you’re more likely to continue it. 

As your wealth grows, find new ways to cut back on expenses, increase your income, and save more.

#5 Review your savings goals monthly to ensure you’re on track

Even if you’re automating savings, check in monthly to make sure you’re meeting your goals. 

If you get off track, don’t sweat it. Persistence is key. 

The ideal situation is having enough money coming in to cover your needs, wants, and savings goals. But, if you discover you’re coming up short one month, look for ways to scale back. 

This could mean focusing on one savings goal at a time. It could be finding ways to cut back expenses from your needs and wants categories or supplementing your income with a side hustle. It could also mean taking on all of these. 

Keep your eye on the prize. Do whatever it takes to stay on track toward financial freedom. 

#6 Commit to being financially free. 

Most people gravitate towards structure and discipline, even if flirting with their wild side occasionally. 

When you start saving monthly and paying yourself first–and stick to that routine–it’s less likely you’ll break that habit. 

Keep in mind the benefits of having savings tucked away. Whether it’s for a more enjoyable retirement, a planned big expense, or a sense of security in case an emergency arises, financial freedom is the goal. 

It takes commitment to do this. But just like any habit, do it long enough, and it’ll become second nature.

 

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