Borrowers may have heard the term pay yourself first. But what does that mean?
Paying yourself first means borrowers set aside money from every paycheck to go into savings or investments. Before borrowers handle any debts or living expenses, they put money into a savings or investment account, ensuring that they build their assets over time.
How it works
This strategy is relatively straightforward. Borrowers commit to setting aside a certain amount of money every month, regardless of circumstances. This way, they pay themselves before paying their creditors or other monthly bills. This can be a great way to stay on track toward a financial goal, such as investing for retirement or building up an emergency fund.
Depending on their financial goals, the borrower’s money can go into a number of different savings or investment vehicles, such as a savings account, a certificate of deposit (CD), or tax-advantaged retirement account such as a 401(k) or IRA. Some borrowers may choose to split this contribution between multiple accounts, or work toward a single financial goal.
Refinance student loans
Borrowers can still pay themselves first, even if they’re paying down student loan debt every month. One way to do this may be through student loan refinancing. Student loan refinancing can be a great way for borrowers to save money on their student loans, potentially freeing up funds and making it more affordable to pay themselves first. By refinancing, borrowers may be able to get a lower interest rate, which can save them money over the life of their loan. Borrowers looking to refinance should shop around for an interest rate and repayment term that meets their needs.
It’s important to note if you refinance a federal student loan, you will no longer qualify for existing or future benefits offered by the federal government to federal student loan holders. Please consult www.studentaid.gov for the most current information about any federal student loan benefits.
Automate the process
Whether it’s direct deposits into a 401(k) or savings account, it’s often easier for borrowers to pay themselves first if they don’t have to think about it. Automating the process can help. Borrowers can set up a 401(k) deduction from their paycheck, for example, or have a certain amount of money automatically deposited into savings every month. They may be able to set this up through their employer. This way, borrowers don’t have to remember to make the contribution each month – it happens automatically.
Create a budget
One great way for borrowers to build a “pay yourself first” plan into their finances is to make a budget. The budget should account for paying themselves first, student debt payments, and regular living expenses.
Borrowers can start by calculating regular monthly income and subtracting any fixed expenses, such as rent or mortgage payments. Next, create a realistic estimate of variable expenses, such as groceries, transportation, and entertainment. Finally, decide how much to put into savings and debt repayment each month. With these steps, borrowers can develop a realistic budget that helps them achieve their financial goals.