Whether your goal is to buy a car, pay for a wedding or boost your retirement nest egg, you need to be mindfully “paying yourself first” in order to achieve these goals. In today’s “Financially Savvy Female” column, we chat with Matthew Grishman, principal and wealth advisor at Gebhardt Group Inc., about what exactly this means and why all women should be doing this.
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What does it mean to pay yourself first?
Paying yourself first means recognizing that your most valuable asset, your best investment, your most precious financial resource is YOU.
It means knowing you are worth setting aside a pre-determined amount of each paycheck for, to invest in a way that makes you better, so that you are able to be the greatest version of yourself possible. This is absolutely the most critical step to creating wealth for yourself and your family — to set aside money to invest in you every month, before a single cent is spent on anyone or anything else.
We are all responsible for creating our own wealth. No one is going to do that for us (unless we are blessed with an inheritance of some sort). No stock investment or piece of real estate is going to do that for us (in most cases). We all have a unique ability, and it’s up to us to invest in ourselves.
How can you figure out how much you can realistically set aside each month?
Deciding how much you can realistically save is completely up to you. It’s about shifting your mindset about what’s really important to you. If you believe you are your very best investment, then deciding to pay yourself first can be as easy as starting with 10% of your take-home pay.
Compare what’s left (90%) with your monthly expenses. First, break them down into two main categories: have to’s and want to’s. There are six primary have-to’s: roof over your head, food in your fridge, clothes on your back, communication, transportation and healthcare. Any expense that falls under these categories is considered a have-to expense. Everything else is a want-to expense.
Many people can find the 10% they need to begin paying themselves first by eliminating some of the want-to’s. But it really boils down to whether or not you believe paying yourself first is a have-to or a want-to. This becomes a much easier exercise if you resolve that paying yourself first is a have-to.
How can you put the habit of paying yourself first into practice?
Take the thinking about it out of the equation. Make it automatic.
The easiest way to put this into practice is to log into your bank through an app on your computer, tablet or smartphone. There you can quickly and easily open up a new savings account linked to your checking account. For many banks, one of the steps to opening that account will be to set up any automatic transfers from your checking account to your savings account. This is where I highly suggest automation by choosing to have these monthly transfers happen automatically on the same day as your deposit. Take away the temptation of skipping a month.
Is a savings account always the best option for your ‘pay yourself first’ fund?
The first place to put these funds to create some feeling of financial stability is in a good old-fashioned bank savings account. How would it feel to have six months or a year’s worth of living expenses set aside in a bank account? Financial stability — which can lead to financial security, which can lead to financial independence — all starts with a foundation of liquid savings that someone can lean on when the unexpected happens. I see people all around me (myself included!) feel a greater sense of freedom to explore possibilities when they feel a basic sense of financial stability underneath them.
Once that stability bucket of money is full, I would then advise [putting those funds into] investment accounts and/or retirement accounts for future financial security and independence. Working with a financial advisor is critical in determining how best to allocate these funds beyond the simple savings account.
It’s always easier to stick to a habit when you have a goal in mind. What are some short- and long-term goals women should set for these funds?
Learning a new language, taking flight lessons, exploring new places with friends, making home improvements, supporting your children and their education, investing in a family vacation home on the beach, starting a business. Setting specific short-term and long-term goals [can help you] stick with it.
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GOBankingRates wants to empower women to take control of their finances. According to the latest stats, women hold $72 billion in private wealth — but fewer women than men consider themselves to be in “good” or “excellent” financial shape. Women are less likely to be investing and are more likely to have debt, and women are still being paid less than men overall. Our “Financially Savvy Female” column explores the reasons behind these inequities and provides solutions to change them. We believe financial equality begins with financial literacy, so we’re providing tools and tips for women, by women to take control of their money and help them live a richer life.