- Cash Flow
“Purse First” coined by Bob The Drag Queen, winner of RuPaul's DragRace Season 8 reminded me of one of the most fundamental mindset changes in personal finance.
For a lot of people saving money is usually an after thought. I was the same way not too long ago: payday would hit, I would spend most of it and maybe if money was leftover I would move it into a savings account. 🤷🏽♂️
When I first started getting in control of my money, one of the simplest but biggest changes I made was paying myself first. You might ask: "Isn't getting paid for my work the same as paying myself?". 🤔 The short answer is no, getting paid in exchange for work is called earned wages or income. That income we receive is our opportunity to pay ourselves or pay others what we earn.
“Pay Yourself First” means putting a portion of your income into savings or investments before spending it on lifestyle needs and wants.
It's such a simple mindset shift, but it has the potential to exponentially grow your wealth and imrove financial stability. 🤯 Now, instead of saving whats leftover from my paycheck I'm spending whats leftover from contributions to my savings and investments.
Why You Should Pay Yourself First
- It forces you to live below your means and helps reduce lifestyle inflation. Lifestyle inflation is when your spending habits increase with your income.
- It helps ensure your net worth will grow overtime. Rich people aren't the only ones with a net worth, everyone has one! Your net worth is the value of any assets you own (like cash and investments) minus your liabilities like debt.
- Maximizes your access to cash, especially in an emergency.
- Helps you climb out of the paycheck to paycheck lifestyle.
Of course, we all have basic needs like paying rent and feeding ourselves at the bare minimum, so in some cases you may not be able to pay yourself anything. If you aren't able to save any money its likely you're living above your means. Be honest about what your actual needs are, adjust spending on your wants and reduce any lifestyle inflation. Cutting expenses is often the easiest way to start increasing savings but after a certain point the only other option would be to increase your income.
How You Can Pay Yourself First
Be intentional, think about your personal goals and how you can achieve them by paying yourself the money you need to reach them.
Do you have what you need for an Emergency Fund? Is there a vacation your looking to plan? Student loans you want to pay off? A business you're trying to start? How much cash do you need and by when?
Here are some ways you can get started paying yourself first:
- Scheduled transfers: most banks with online account access allow you to transfer cash between accounts internally or externally to another bank for free. This can help automate your savings goals, especially if they happen right on payday. You won't even notice its missing. 😉
- Round-up apps or similar services like Acorns, Qapital or Digit. These services round-up purchases to the nearest dollar and deposit the change into a separate account.
- Pay off debt early: Paying off debt earlier than scheduled reduces the total interest paid out to lenders, which then free's up cash you can use to pay yourself.
- Investing in the stock market consistently over long periods of time has been found to yield around a 7-10% average return. While you're money isn't guaranteed to grow at that rate every year, investing is a necessary part of ensuring your long term financial future. Index funds are a great place to start like the popular S&P500 Index ETF's.
- Maximize tax-advantaged investment contributions: Most often this a retirement investment account like a 401k or Roth IRA if you have one. If your employer is sponsoring an account like this with a company match, at least get that free money!
For me personally, automating my savings goals using scheduled transfers has been the most effective. It fits perfectly into my budget so I can set-and-forget my savings goals, or change them at any time.
If you can't pay yourself, how in the hell are you gonna pay somebody else?
Paying yourself first helps improve your financial stability, allows you to take on more risk, and in extreme cases even retire early. Always remember, purse first!