It’s easy to spin your financial wheels for months or even years at a time if you haven’t internalized the mindset that takes you out of reactive mode. Many people think that an aggressive debt repayment schedule is the way to get ahead, but that attitude misses a vital point. To build real financial security, you have to get into the habit of paying yourself first.
Putting your financial security and long-term needs at the top of your financial priority list changes the way you think about money. You’ll retool the way you approach budgeting and saving once you realize the benefits of paying yourself first.
But paying yourself first doesn’t mean indulging yourself. We’re not talking about a summer vacation or a nicer car or those designer shoes you’ve been lusting after (although those are all worthy goals for your money, too, once you’ve taken care of your other financial obligations). Paying yourself first means putting the financial moves that build your current and future financial security at the top of your financial priority list.
Here’s how to get started.
Prioritize your personal finances
Get your finances on your calendar. Do you keep a calendar or to-do list? Even something as basic as Google Calendar with reminders can help you keep up with monthly bills. Add long-range goals and infrequent tasks to your calendar as well, including time to review your credit report once a year, pay estimated quarterly taxes, and gather your tax records and prepare your tax return.
Pay yourself first. Before you begin paying bills every month, pay into your own financial safety net: your emergency fund. Financial advisors recommend keeping three to six months’ worth of income in a savings account you touch only in dire need. This money isn’t for things like vacations or gifts or even minor car repairs, all of which you know are going to come along at some point. This money is intended to be on hand for true emergencies: the loss of a job, a death in the family, a health emergency.
If you put so much money toward other financial obligations that you have no way of responding to an unexpected financial demand, you’ll find yourself going deeper into debt rather than continuing to climb out. Building an immediately accessible emergency fund in your savings account is just as important as staying on top of paying your monthly bills on time.
Pay yourself second, too. There’s one more priority that goes above things like paying off the car loan or getting ahead on the mortgage: retirement savings. You may assume you’re not ready to focus here if you’re paying down debt or saving for something big like a down payment for a house. But retirement savings are a long game that relies on time for your money to grow. Time lost now is time you can never regain. Scrape together enough to open a long-term certificate or IRA before you add funds to an entertainment spend bucket.
Choose a plan of attack for debts and stick to it. Don’t spread your money too thin by dividing payments equally among all your debts. Instead, make faster progress with one of two payoff strategies. Start a payment “snowball” rolling by making as big a payment as you can handle on the debt with the highest interest rate; make minimum payments on everything else. Once that first bill is paid off, shift your focus to the one with the next highest interest rate. Because some accounts may take a long time to pay down, some people prefer paying off the smallest debts first so they can see quicker progress. Either way, dump everything you’ve got in one place to maximize your results.
Look for the highest interest rate. Here’s a good rule of thumb that will serve you well in almost any financial endeavor: look for the highest interest rate. The best savings account is the one with the highest interest rate. The best long-term certificate is the one that earns you the most money—the one with the highest interest rate. The credit card or loan you should pay off first? That’s right, it’s the one with the highest interest rate.
Anticipate your next rung of financial goals. The bigger your financial goals are, the longer it’s likely to take you to prepare. Even if your nose is to the grindstone paying off credit card bills, keep one eye on what you’d like to do next: upgrading your car, buying a house, heading out on a destination vacation getaway. That way, when you finally pay off the credit card or finish off the car loan, you’ll be prepared to shift your money in a new direction and keep it going into something that will strengthen your financial future.
Make a difference for yourself
Get started making the most of your money today by putting in into the type of accounts that make sense for your financial goals. Get started with a PenFed Access America Checking account. Then put yourself first, and start opening financial doors by matching your goals with a PenFed savings account, certificate, or IRA.