Do you often feel you have little or no money left at the end of the month? Do you want to save more money for special things or retirement? Then pay yourself first. It’s a different budgeting strategy, but one that works for many people. Paying yourself first—also known as “Reverse Budgeting” —doesn’t mean you get to skip the car loan or utility bills for the month. What it DOES mean is that you arrange to take money out of each paycheck and tuck it aside in an account that you essentially don’t touch. But you do it FIRST, before you pay the other bills.
Sometimes we just forget to save, but it’s important to have some money set aside for your future goals or emergencies. Paycheck after paycheck, it’s the same routine: bill drudgery! Once you pay the bills, and the regular expenses have been paid, there just isn’t enough left over for building your savings. Paying yourself first is an effective savings strategy for many because it takes willpower right out of the equation. Instead, a portion of your income is immediately funneled into your savings at regular intervals.
Here’s how it works: Let’s say your monthly income is $4,000, and each month you want to save $200 for your emergency fund, $250 for retirement and $150 for a new car. Set aside the $600 first and use the remaining $3400 to use towards other costs – rent or mortgage, groceries, utilities, and loan payments. If you come up short, then you’ll need to either adjust your savings amount, or curtail your spending habits. The tips below should point you in the right direction for saving money.
- Put your savings on automatic. Make saving painless when you establish automatic withdrawals that pull money monthly, bi-monthly, or weekly from your checking account to go towards savings. Also, commit to putting every tax refund, cash gift, and work bonus into your savings account. If you get a raise at work, pretend it never happened. Live the same you were living before the raise, and put the difference automatically into your savings account.
- Fund your retirement. Automation is also a great way to set up contributions from your pre-tax salary to your 401(k) or Individual Retirement Account (IRA). If your employer doesn’t have the ability to deposit some of your paycheck into your savings account, then set up automatic transfers each month from your checking to savings. You can use Tower’s Mobile App or Home Banking to arrange automatic transfers from your checking account to your savings account or IRA.
On a related note, are you leaving money on the table? Take advantage of any retirement savings plans offered through your employer—like 401(k) or 403(b)—especially if they include employer match. Not participating in these matching programs is essentially leaving money on the table for no good reason. Remember, too, that these retirement plans have added tax advantages— the money is deducted from your gross pay, with taxes deferred until you actually start withdrawing funds in the future.
- Make your savings “goal oriented.” Setting money aside in a generic savings account is not terribly imaginative or inspiring. Instead, give each goal a separate account, like “Hawaii Trip” or “Dream House in the Country” or something that gets you a little motivated to save, keeping that visual goal in front of you. Tower’s “You Name It” savings club account allows you to open up to 13 separate accounts for your savings goals.
- Automate your bills. Avoid missed payments and late fees by setting up automatic payments for recurring charges. That’s money saved! Also, make sure you are tackling your debt; you don’t want to be paying interest on high-rate credit cards while funneling your money to savings. Pay down your debt first before starting your reverse budgeting plan.
- Look for additional ways to save. Once your automatic savings plan is in place, look for little ways to make additional contributions to your savings account(s). You can empty the contents of your spare change jar and deposit it to savings. If you’re getting money back from the IRS, put some or all of it towards your savings account. Maybe you’ll even want to consider a side gig for some extra cash.
Finally, some words of wisdom from super-saver billionaire Warren Buffet: “Do not save what is left over for SPENDING, but spend what is left after SAVING.”
Resources: NerdWallet, Currency Marketing