As a contractor, managing your finances is crucial for long-term financial health. One effective way to build wealth while maintaining cash flow is by following the “pay yourself first” strategy. It’s simple yet powerful, ensuring you save and invest for your future.
What Does "Pay Yourself First" Mean?
“Pay yourself first” means setting aside a portion of your income for savings and investments before spending on bills or other expenses. Treat your savings like a top-priority bill.
How to Implement It:
- Automate Your Savings: Set up automatic transfers to your savings or investment accounts as soon as your income hits your account.
- Decide on a Percentage: Aim for saving 10-20% of your income. Starting with even 5% can build momentum over time.
Why Does It Work?
This strategy simplifies saving into a consistent habit. Automation makes it a “set it and forget it” method.
Benefits:
- Builds Discipline: Prioritizing savings avoids the pitfall of leftover-saving.
- Grows Wealth: Consistent savings in high-yield accounts or investments benefit from compound interest.
- Reduces Financial Stress: Funds for emergencies or investments provide peace of mind.
Real-Life Application:
Imagine you earn $5,000 per month. By following "pay yourself first" and saving 10%—or $500—each month:
- High-Yield Savings Account:
- Monthly Savings: $500
- Annual Savings: $500 x 12 = $6,000
- APY (Annual Percentage Yield): Reflects interest earned with compounding.
- Interest Calculation:
- Interest Rate: 4.30% APY
- Annual Interest Earned: $6,000 x 0.043 = $258
- Total After 1 Year: $6,000 (savings) + $258 (interest) = $6,258
- Investing in Index Funds:
- Monthly Savings: $500
- Annual Savings: $6,000
- Annual Return on Investment: Assume a growth of 7%
- Interest Calculation:
- Interest Rate: 7% annually
- Annual Interest Earned: $6,000 x 0.07 = $420 (first year, compounding thereafter)
- Total After 5 Years: Contributions and growth could grow your investment to around $34,000.
Best Tools for Paying Yourself First:
- High-Yield Savings Accounts: Use accounts like Capital One’s 360 Performance Savings to boost savings.
- Investment Platforms: Automate investments with apps like Robinhood or Fidelity.
Tips to Maximize the Strategy:
- Increase Over Time: As income grows, increase your savings percentage.
- Don’t Skip: Maintain the habit even during lean months.
- Build an Emergency Fund First: Have 3-6 months of expenses saved before investing.
The Bottom Line:
Paying yourself first ensures consistent savings and investments, building long-term security. At Gig Wage, we empower contractors by simplifying payments and supporting your financial journey. Ready to streamline your finances? Visit Gig Wage to learn more.
Additional Resources:
https://www.businessinsider.com/personal-finance/banking/pay-yourself-first
https://www.thrivent.com/insights/budgeting-saving/what-does-it-mean-to-pay-yourself-first#:~:text=The "pay yourself first" budgeting,naturally adjusts to what's left.
https://www.investopedia.com/terms/p/payyourselffirst.asp
https://www.nerdwallet.com/article/finance/pay-yourself-first-reverse-budgeting
https://www.nerdwallet.com/article/finance/good-debt-vs-bad-debt
