5 TAX TIPS - Pay Yourself First

How many times have you or someone close to you, said the phrase "I just don't earn enough money to save some every month." Probably so much so, that if you had a dollar for every time you or somebody else uttered those words, you'd be rich by now and wouldn't need to be saving any money. But that isn't the case, everyone who complains about this situation has failed to comprehend the most basic financial advice out there, Pay Yourself First. Saving money shouldn't be something you do after paying all your monthly bills, purchase your groceries or pay your rent. As a matter of fact, it should be the first thing you do, and before you ask, yes, this is actually possible.

There are 5 basic tax tips to help you master the art of paying yourself first:

1. Run the numbers and make a Budget.

As with any financial venture, the first step is always to make a realistic budget. In order to learn how to pay yourself first, you'll need to master the dreaded task of "budgeting." Although you don't necessarily need to come up with detailed spreadsheets, complex calculations, and thorough tracking of every single purchase, it does help a little. However, as long as you keep track of all major expenses in a month, like rent, transportation, loan payments, cell phone bill, utilities, food, etc. You are good to go. If you want to be on the safe side, add up to a 10% buffer.

2. Set a fixed amount to save every month.

If for example, after covering all your monthly costs (including the 10% buffer), you are left with $700 you can set a fixed amount between $200-$300 and place it in your savings account. You can actually arrange for this to happen automatically once you've collected your paycheck. Committing to this system guarantees two things, your savings will grow safely and you’ll avoid going over budget with unnecessary expenses.

3. Set up a savings account with the best interest rates.

If you want to save money, a checking account is the worst place to start. The interest rates on such accounts are ridiculous, the best case scenario will earn you a penny a year. Traditional savings accounts aren't much different, most financial institutions will offer you an 0.01% interest rate, not exactly the most lavish of rates, however, if you search around you will find better and higher rates.

Online Banks such as Ally, GE Capital Bank or Barclays offer interest rates of 0.90% and higher. The number may seem insignificant but it can be the difference between growing 40 cents a year and $38 a year.

4. Automate your savings account.

If you can rely on yourself to pay yourself first, the best thing you can do is to automate your savings account. This way, the only money transfer into your checking account will be for paying bills and whatever other monthly expense you have. This also helps get rid of any temptation to spend your money on things you don't need.

There are two ways you can do this, automatically splitting your direct-deposit paycheck to send a percentage directly to your savings account, or you can talk to your employer and have a fixed percentage from every paycheck deposited to your savings account.

5. Keep your fixed amount realistic.

Not everyone is capable of saving between $200 and $300 from their paychecks every month, but don't be discouraged by this. Just make sure that whatever fixed amount you pick is well within your range. The most important thing about paying yourself first is to actually do it, regardless of the amount. As a general rule of thumb, you should save up to 15% of your paycheck. 

Author Name: José Miguel Gutierrez. Content Writer. 

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For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Summit Brokerage Services, Inc. nor any of its representatives may give legal or tax advice.

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