Pay yourself first to save money
It’s important to save money. In order to get ahead, you must put money away for the future. In order to retire happy, you must save money because we all know that government benefits will not be enough on its own. To protect yourself from financial disasters, you must put away savings for emergencies. Saving money is one of the most important financial habits you can learn.
It’s hard to save
For most people, it’s hard to save money. The problem with saving money is it requires a certain level of discipline to make it happen. Most people are not natural savers. They lack what I call the savings gene. Saving money is hard because spending is more natural, a whole lot easier and way more fun. Because most people are not natural savers, the only way to save is to create a forced discipline through a concept called Pay Yourself First.
Related article: Is savings nature or nurture?
Two ways to pay yourself first
The best way to “pay yourself first” is to save money through a workplace savings program. Roughly 40% of all small to medium-size businesses have a workplace savings program and most of them include employer contributions. This is without a doubt the best way to save . . . when your employer helps you. I am shocked when I see about 15% of employees who have access to matching programs through their employers do not take advantage of the opportunity to save money and more importantly get free money.
In my workplace education programs, I always encourage people to save money through their programs at work and even encourage people to save more than the minimum matched amount.
The second way to pay yourself first is to create a forced saving plan by setting up an automatic payment from your bank account each and every month. For people who do not have a workplace savings program, it’s best to make savings automatic through these pre-authorized debits.
Savings rates make all the difference
How much should you save? Your savings rate is simply the percentage of gross income you put away. For example, a 10% savings rate means you are investing 10% of your gross income every year.
Related article: Saving for retirement is simple, not easy
The savings rate in Canada has been under 5% for the past 15 years which in most cases is not enough. The savings rate for employees who are still part of a defined benefit pension plan typically has the highest savings rates at 15% to 20%. People who have Group RRSPs and Defined Contribution Pensions typically have savings rates of 6% to 12%. The higher the savings rates, the more likely you are to be able to retire comfortably, retire early and live a better retirement. It’s just math.
Related article: Savings rates are the key to defined benefit pensions
The bottom line is to pay yourself first. The reality is it matters less what you invest in and more that you maintain a discipline to put away something regularly. If you don’t believe me, take a look at your investment statements and figure out how much of your money is money you put in versus money from growth as a result of investing. I don’t care if you are in your 20’s, 30’s, 40’s or 70’s; I am willing to bet that 99 times out of 100, most the money is your own money that you put in.
The secret to wealth is to focus on being a good saver first! You can’t invest what you don’t save. Focus on your savings rate and increase it as much as you can!
Take part in the saving challenge
My challenge is simple. I challenge you to start an automatic savings plan this week either through your bank account or through your work. It matters less what you put away each month or each paycheque. What matters most is you put something away. I further challenge you to keep that going for at least 21 months. Don’t do it for me! Do it for you!
Has anyone done this before and found success? If so, type in some words of encouragement by sharing your story below!
Check out my other principles of saving if you need a little help developing the savings habit.
YOU ARE RIGHT