The Payday Savings Plan
The payday savings plan enables consistent savings, sets aside money before it is spent on other disposable income items, and prioritizes savings as a part of your budget. You must plan to save money. It is just like the 52 week savings plan for those who get paid weekly or choose to set aside money every week. However, this retirement savings plan is a bit easier to follow because you are setting aside money each time you get paid.
It’s a simple concept: pay yourself when you get paid.
Instead of just budgeting to pay bills, make savings a part of your monthly budget. If savings aren’t a part of your monthly budget, then the chances of you actually setting money aside each month are greatly diminished.
Realistically, most of us spend based on what we see in our wallets or as our checking account balance. After all your bills are paid, if you have $500 left in your account, you probably feel that this entire amount is your disposable income. If, however, you have included savings into your budget—let’s say, $200—and prioritized it as you would any other expense, you would now only see $300 in your account as disposable income. This would force you to adjust your spending.
The payday savings plan enables consistent savings, sets aside money before it is spent on other disposable income items, and prioritizes savings as a part of your budget.
You must plan to save money. Saving is not something that is going to happen on its own. It is a habit that you must purposefully implement into your budget.
Look at your entire budget.
Before you can decide how much to save, you must look at your income and expenses. After all of your bills are paid each month, the money that is leftover is your disposable income. So, for example, once you know that you will have approximately $500 a month left after all your bills are paid, you can then decide how much to set aside for savings. Build savings in as a part of your budget.
Decide how much you can afford to save each month.
After you have taken a look at how much money is left over each month after all of your monthly obligations have been met is your disposable income. The disposable income is the money that you spend on the stuff you want—not the stuff you need. This is your fun money. Yes, it is fun to eat out or buy a new pair of shoes, or whatever your extra money each month goes to, but the short-term disappointment of sacrificing some of these wants will reap huge benefits for you in the long-term by saving and planning for retirement.
Commit to a fixed amount that you can put into savings each pay period.
It is easier to save each month when you are setting aside a set amount each time you get paid. Some savings plans tell you to start out saving $1 the first week and working your way up to saving $52 the last week of the year; this sounds good, but the reality of this means that the first month, you are saving $10, and the last month, you are saving over $200. That is a huge swing in your budget, one that can be hard to stick to, especially when unexpected expenses come up. Setting aside a specific amount allows you to budget more consistently.
Set up automatic funds transfer.
Whether your savings are through an employer-sponsored retirement plan or just depositing in a savings account each, set it up to go directly from your paycheck to that account. If the money is set aside before it even hits your bank account, it is not every likely to be spent. You know the old saying: out of sight, out of mind…
Don’t turn down “free” money.
If you have an employee sponsored retirement plan, such as a 401k, you are turning down free money if you aren’t participating in it. Many companies have some sort of matching component to their 401k plan. So if you contribute 2% of your paycheck, your employer will match that and also contribute 2%. If you aren’t contributing to a company sponsored plan, you are literally turning down free money.
Even if your employer doesn’t match or if you are self-employed and it is just you contributing to your account, you are still missing out on free money if you aren’t contributing each month. How is that possible? It has to do with the time value of money and the compounding effect that it has. Ok, this may sound a bit confusing, but simply stated, your savings account balance grows by compounding on the principle and interest each month. So the more you contribute, the more interest you will get on the larger balance each and every month. So the sooner you can start saving, the better.