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What is the Concept of Pay Yourself First?

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  • Written By: Sherry Holetzky
  • Edited By: Bronwyn Harris
  • Last Modified Date: 03 November 2016
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You might have noticed that money comes directly out of your paycheck before you even receive it, at least in the United States. The government understands the concept of pay yourself first, or paying itself first, by taking out taxes before you get your hands on your income. However, this concept can also be used to your benefit, by applying it to saving money.

Pay yourself first simply means automatically setting aside a certain percentage of each paycheck to put into savings, before you do anything else with your money. If you don’t pay yourself first, there will always be something that money could be spent on instead of saving it. There never seems to be a perfect time to start saving money, so you just have to jump in and do it.

After you get used to the pay yourself first concept, you really won’t miss the money. It is a good idea to put that amount into a separate account, so you will not be tempted to spend it. You might want to do some investing or simply stash the cash away in a high interest savings account to put toward retirement.

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Planning for the future is very important, and the earlier you start saving, the better. If you pay yourself first, you know you will have a certain amount in a number of years. There are many low risk investment vehicles that you might experiment with in order to increase your savings for retirement. Even if you already have a pension or other retirement fund, it’s still a good idea to pay yourself first to accumulate more money for the future.

Some types of retirement accounts will even allow you to pay yourself first ahead of the government. Various accounts such as 401K or an Individual Retirement Account, most commonly known as an IRA, may allow you to deposit a certain amount of money, before taxes, or you may be able to deduct that amount from your taxes.

You are probably wondering how much is a good amount to pay yourself first. A good rule of thumb is to pay yourself an amount equal to at least one hour of work for every eight hours. If you do not make an hourly wage, you can easily figure out a rough estimate of how much you should save. Divide your annual salary by fifty-two weeks and then divide again by the approximate number of hours you work per week then divide by eight.

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anon107958
Post 2

The calculation at the end should say to divide your salary by fifty-two weeks, and then divide by the number of hours you work per week. This will give you your hourly wage.

From there, assuming you work eight hours per day, you can simply multiply the figure by five (days per week), to get the weekly amount to save. You can also multiply the weekly figure by ten if you're paid every two weeks, etc.

mendocino
Post 1

It is wise to put money aside regularly, and save it in a retirement account such as IRA.

It is smarter to do that even before putting money into a college fund, for a number of reasons. One of them is that money from Roth IRA account for example can be withdrawn and no penalties are assessed.

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