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Paying yourself first

Paying yourself first means that before you spend any of your money on bills, food, or other expenses, you put some of it into savings. This way, you're making sure that you're saving money each time you get paid, rather than hoping there's something left over at the end of the month. This can be a good way to build up your savings over time and get into the habit of spending less than you earn. Created by Sal Khan.

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Video transcript

- [Instructor] You might have heard the term, paying yourself first. And this just means put your safety, your needs, especially your future needs first before you think about other things. So let's give ourselves an example. Let's say that you wanna buy a laptop that is $624 and you currently do not have the $624 to buy that laptop. And that laptop will help you with your work, maybe it'll help you with school or it can help your family in some way. It can also provide other benefits that you want. So you want your future self to have this laptop, and you say, I want this laptop over the course of the next year. So you want this in a year. The paying yourself first philosophy would say, all right, every paycheck, how much do I have to put aside first before I do anything else to make sure that I'm gonna get my hands on this laptop? So let's have an example. Let's say that I'm paid weekly. If we are paid weekly, how much do we have to put aside for every paycheck in order to at the end of the year have $624 saved up for the laptop? Well, if we're thinking weekly, we have to save that $624 over the number of weeks in a year. So we're gonna divide that by 52 weeks. And you could do that by hand or you could punch that into a calculator. And you're going to see that you're going to have to save $12 per week which doesn't feel like a lot. And so what you would do is every time you get that paycheck before you even think about anything else, you would take that $12 and transfer it maybe into a savings account. That's kind of your laptop savings fund. What if you instead of getting paid weekly, you're paid biweekly. So that means you're getting paid every other week or every two weeks. Well, then you're going to have to save twice as much since it's not covering just one week of savings it's two weeks of savings. So in that situation it's going to be $24 per every two weeks. What if you are being paid semi-monthly? And you might think that these are similar that if you're paid every other week or if you're paid semi-monthly which means you're paid twice a month, but months don't have exactly four weeks or at least most months don't have exactly four weeks. And so the way that you would calculate for semi-monthly is you say all right, there's 12 months in a year so there's 24 semi-months in a year. So it would be $624 divided by those 24 semi-months I guess you could call them. And then that would get you $26, $26 per semi-month. And then last but not least, if you're paid monthly and I'll do that in a different color for kicks, if you're paid monthly, well, then you're gonna take that $624 and divide it by the 12 months and you would wanna set aside $52 per month. So this video it gave us a little bit of practice thinking about our paychecks whether we're getting paid weekly, biweekly, semi-monthly or monthly. But it's really thinking about, hey, you have a pretty big goal over here, but if you divide it by the number of paychecks that you're getting in a year, you can then think about how much you have to set aside paying yourself first every paycheck so that it will add up over the course of a year whatever time period you're thinking about, so that you can get and reach your goal.