Rent, groceries, gym memberships, home maintenance, and streaming subscriptions are among the monthly expenses that leave little for savings accounts by month's end.
For those facing this situation, a savings strategy known as 'pay yourself first' is being discussed.
This budgeting method involves allocating a portion of income to savings, retirement accounts, or investments immediately upon receiving a paycheck, rather than saving what remains after expenses.
Sometimes called 'reverse budgeting,' it treats savings as a fixed expense, prioritizing it over discretionary spending.
Proponents note that consistent savings through this method can help achieve long-term financial goals like home purchases or comfortable retirement.
The practice is described as an important financial exercise that ensures savings grow over time and progress toward goals is made.
It helps build financial discipline, prevents overspending, and encourages responsible budgeting.
Additionally, paying yourself first creates a financial safety net for unplanned expenses, reducing reliance on credit cards or debt.
To implement the strategy, individuals are advised to set a savings goal, often starting with 20% of pre-tax income—15% for retirement and 5% for short-term savings—though percentages can be adjusted based on finances.
Savings should be placed in accounts that generate compound returns with minimal costs, such as savings accounts designed for long-term holding.
High-yield savings accounts, paying 4% APY or more, are recommended for short-term savings, while tax-advantaged investment accounts suit longer-term goals like retirement or college.
Consulting a financial adviser is suggested for guidance on account selection and savings strategies.
Making savings a line item in a budget allows adjustments to spending after savings are set aside. If expenses exceed remaining income, discretionary spending may need reduction.
Automating contributions through bank transfers or employer deductions to accounts like 401(k)s can help prioritize saving, especially with regular pay intervals.
Manual transfers may be necessary for inconsistent pay.
Adjustments to the plan might be needed initially or due to life changes such as marriage, salary shifts, or relocation. Savings may be reduced if expenses rise or increased if pay rises, with budgets revisited annually.