Pay Yourself First
Emergencies happen when you least expect it, which is why planning for emergencies is so important. The best way to create one is to pay yourself first.
Paying yourself first means treating your savings like a priority bill. Don’t wait until your other bills have been paid. If you wait, you may spend your extra money before you put it into savings.
At least 10% of your net income should be set aside for savings. The easiest way to do this is to have it directly deposited from your paycheck into your savings account. If you are able to save more than 10% of your net income, that is even better.
How Do You Save That Much Money?
You are not going to save six months of living expenses overnight. Don’t let that discourage you. Starting with small amounts that you save regularly will add up over time. Also, there may be times during the year where you receive extra money. Put your tax refund or a year-end bonus into your savings account.
Where Should You Keep Your Emergency Savings?
Set up a savings account that you don’t use regularly. This way, you won’t use the money for other things. But you also don’t want to put money in an account where it’s hard to get the funds. Paying yourself first doesn’t mean that you reward yourself first. Sure, it’s fun to treat yourself to a new outfit or movie now and then. But these should not take priority over your bills.
Here Are Three Important Reasons to Start Saving Now:
- When you pay yourself first, you’re making saving a priority. You’re telling yourself that you are important. Building savings is a great motivator. It’s empowering.
- Paying yourself first encourages sound financial habits. Most people spend their money in the following order: bills, fun, saving. Not surprisingly, there’s usually little left over to put in the bank. But if you move saving up to the front, you’ll set the money aside before you find ways to spend it.
- By paying yourself first, you’re building a cash cushion for emergencies. Regular, steady contributions are an excellent way to build a nest egg. You can use the money to deal with the unexpected developments that life may bring. You can use savings to purchase a house, enjoy retirement, or achieve other financial goals.