"Pay yourself first" is a popular phrase in personal finance.Do the opposite of paying all your bills and expenses first and then saving whatever is left over.To take care of everything else, set aside money for investing, retirement, college, a down payment, or whatever it is that requires a long-term effort.
Step 1: Determine your monthly income.
You have to figure out how much to pay yourself.Take a look at your monthly income.Add together all your income sources for the month to determine monthly income.After deductions from paycheck or taxes, this is a net amount or take- home income.If you have an income that fluctuates from month to month, use your average income over the past six months or a number slightly below average to represent your monthly income.You're more likely to end up with more income if you choose a lower number.
Step 2: Determine how much you spend each month.
You can easily determine monthly spending by looking at your banking records.Add together bill payments, cash withdrawals, and money transfers.You should include any cash payments that were spent as well.There are two basic types of expenses, fixed and variable.Fixed expenses include rent, utilities, phone/ internet, debt repayments and insurance.Variable expenses can include food, entertainment, gasoline, or other purchases.If you find it hard to track your expenses manually, consider using software like Mint.Mint will track your spending by category, if you sync your bank accounts with the software.This will give you an up-to-date view of your spending.
Step 3: Subtract your monthly expenses from your income.
Subtracting income from expenses lets you know how much money you have left over at the end of the month.It can help you to figure out how much to pay yourself first.You wouldn't want to pay yourself first and then not have enough money for fixed expenses.If your monthly income is $2,000 per month, and your total expenses are $1,600, you have $400 to pay yourself first.This gives you an idea of how much you can save each month.This number could be much higher.You can take steps to reduce expenses if you know the amount of leftover money.Reducing expenses will become more important if you are negative at the end of the month.
Step 4: You should look to reduce your fixed expenses.
It does not mean that you can't replace fixed expenses with lower ones.Take a look at the different types of fixed expenses and see if there are ways to reduce them.If your cell phone bill is fixed every month, is it possible to switch to a plan with less data to save money?If your rent takes up more than half of your income, you should consider downgrading from a two bedroom to a one bedroom apartment, or relocating to an affordable area.If you have car insurance, you should always contact your broker to see if there are better deals out there.Debt consolidation loans can be used if you have high levels of credit card debt.You will be able to pay off your credit card debt with a lower interest rate consolidation loan.
Step 5: You should look to reduce your expenses.
Most savings can be found here.Take a close look at your expenses each month to see where your spending is not going.Coffee purchases, eating out, grocery bills, gasoline, and leisure purchases add up over time.If you want to reduce these expenses, think about what you need.Cut out as many wants as possible.Purchasing lunch at the cafeteria is a want if you need to have lunch every day at work.The more affordable option is to make a lunch each day.Variable expense areas that take up a large portion of your budget are the key.Do you spend most of your money on gasoline, food, entertainment, or impulse purchases?You can target reductions in those areas by using more public transport, packing more lunches for work, opting for more affordable entertainment choices, or leaving your credit card at home.You can find innovative ways to reduce your variable expenses by doing an online search.
Step 6: Make a list of how much money you have left.
If you have identified areas to cut spending, subtract the amount from your expenses.To figure out how much you have left over, subtract the new expense amount from your monthly income.Assume your monthly income is $2,000 and your expenses are $1,600.You may have been able to find $200 in savings each month after looking for expense reductions.$600 is left over each month.
Step 7: How much do you want to pay yourself?
Now that you know how much you have left, you can pay yourself.Experts recommend different amounts.The author of The Wealthy Barber recommends paying yourself 10% of your net income.Some experts recommend between 1% and 5%.Based on your leftover amount each month, you can pay yourself as much as you want.You can save up to 30% of your income if you have $600 left over at the end of the month.You may only want to put 20% of that in savings, leaving yourself a little wiggle room for unexpected treats or expenses.
Step 8: A savings goal is set.
You should set a goal for a savings amount once you know how much you can pay yourself.Retirement, education savings, or a house down-payment are possible goals.Divide the cost of your goal by the amount you can pay yourself monthly to figure out how long it will take to get there.You may want to save for a down payment on a home.It would take you 13 years to save $50,000 if you saved $300 every month.If you have $600 left over, you could increase your savings amount to $600 to drop the time in half.If you invest in a high interest savings account or other type of investment, the return you get would shorten your time.Search "Compound Interest Calculator" to find out how fast your savings will grow at a certain rate of return.
Step 9: A separate account is what you should create.
This account should only be used for a specific goal.If possible, choose an account with a higher interest rate because it will limit how often you can withdraw money, which is a good thing.Consider opening a high interest savings account.Many institutions pay rates that are above a checking account.You can open a Roth IRA for your savings.Your wealth can grow tax-free over time.The opportunity to earn a higher return than a high interest savings account is offered by stocks, mutual funds, bonds, and exchange traded funds within a Roth IRA.Traditional IRAs or a 401(k) are other options.
Step 10: The money should be put into the account as soon as possible.
You can have a portion of your paycheck deposited into a separate account if you have direct deposit.If you keep track of your balance, you can set up an automatic monthly or weekly transfer from your main account to your separate account.Before you spend money on anything else, the point is to do this.
Step 11: Leave the money alone.
Don't touch it.Don't take money out of it.You should have an emergency fund.It should be enough to cover you for three to six months.An emergency fund is not a saving or investing fund.If you don't have enough money to pay your bills, look for other ways to make money or cut expenses.Don't use your credit card to charge them.