Pay Yourself First

"Pay Yourself First" is a type of budgeting where you automatically deduct investments and savings from your paycheck before it even hits your checking account.

The first step is reviewing your spending and identifying how much you can afford to "pay yourself." Starting with your mandatory spending can help you avoid putting yourself in a situation where you're setting aside more than you can afford.

Next, identify where you want to pay yourself. Setting up an automatic deduction from every paycheck to contribute to your workplace 401k/403b or IRA is an easy place to start. It's also possible to set up automatic contributions to a traditional or Roth IRA, timed for the arrival of your paycheck. If you don't currently have any savings, a high yield savings account can be a good option until you build up an emergency fund. With direct deposit, this can be automated as well. Depending on your financial situation and goals, one, none, or a combination, of the above options may be right for you.

Whatever remains from your paycheck is then deposited into your checking account to be used for bill paying, mandatory and discretionary spending.

Mandatory Spending

This includes your mortgage, groceries, student loan payments, car payments, medical expenses, credit card debt and similar expenditures that are truly necessary for your wellbeing.

Discretionary Spending

This includes eating out at restaurants, buying new clothes, vacations, etc. Anything that you really don’t need to get by. These are expenses that you pay for once you have already contributed to retirement, savings, and all of your mandatory spending.

It should be noted that this plan is not necessarily universally appropriate for every situation. For instance, if you have a lot of high interest credit card debt it may be more beneficial to pay that off before you build up your emergency fund or other savings or investment accounts.

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