What Does “Pay Yourself FIRST” Mean?
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“Pay yourself first” is a simple money management principle where you set aside a portion of your income for savings or investing before spending it on anything else. It means prioritizing your financial future by saving or investing a part of your earnings before paying bills or buying non-essential items.
This approach ensures that you’re working towards your financial goals consistently. But while saving money is something we know we need to do, it’s easier said than done.
We might have good intentions, but then fall short when it comes to ACTUALLY moving cash into our savings account.
No worries!! Here are four of the simplest ways to put your saving on autopilot and always pay yourself first.
1. Start with your paycheck
Once you’re eligible, you can pay yourself first by enrolling in your employer’s 401(k).
The working years pass swiftly, and delaying retirement planning means selling yourself short. Many mistakenly believe there’s ample time to think about it and there’s no urgency.
Yet, the difference between starting a retirement savings at 25 and 35 can be hundreds of thousands of dollars. Therefore, contribute to a retirement account as soon as you’re eligible.
Ideally, you should contribute enough to get the full employer match (if your company offers a match program). But if you have to start with less and work up to this, that’s okay too.
Start by contributing 1% of your income (or whatever you can afford), and then bump it up by 1% each year. These are pre-tax contributions taken directly out of your paycheck, so you probably won’t miss the money.
And if a 401(k) isn’t an option, you can pay yourself first by setting up an individual retirement account (or IRA) instead.
Two options include a traditional IRA which grows tax deferred, so you’re not taxed until you withdraw money in retirement. Another option is a Roth IRA, where you make tax-free withdrawals in retirement.
You can open an IRA through banks and other financial institutions. Once you’ve set it up, automate and move contributions from your bank account to your IRA on a set day each month.
Your employer might even allow splitting your direct deposits. If so, you can have a set amount directed into your IRA.
2. Treat your savings like a new bill
Although saving for retirement is important, you should also set money aside for emergencies – which takes a little more discipline.
My next best advice for paying yourself first is to TREAT YOUR SAVINGS LIKE ANOTHER BILL.
Think about it this way: If a monthly expense increases and you have no choice but to pay it, in most cases you’ll find a way to come up with the extra money. You’ll likely cut out or reduce spending on other things.
Likewise, view your savings account like a new bill “you have to pay.” It’s a bill you pay yourself, before giving anyone else your money.
Decide how much to save each month and then set up a recurring transfer – preferably into a high-yield saving account.
3. Invest on a small scale (outside of retirement)
You can also pay yourself first by investing on a small scale using micro-savings and investing platforms.
I personally use Acorns (for about four years now), and I’ve saved thousands without even trying.
After signing up you can opt into the roundup program and link a credit and/or debit card to your account. Each time you make a purchase, Acorns will round up the purchase and invest your spare change into a diversified portfolio of ETFs. You can also set up one-time or recurring investments into your account at anytime starting at $5.
This is an easy way to get your feet in the game with little money. As a bonus, if you sign up using my referral link, Acorns will give you $5 to get started.
Of course, this isn’t the only option for investing outside of a retirement account. You can also open a brokerage account and invest by means of mutual funds, index funds, or ETFs. Or if you’re comfortable, you can research and pick individual stocks.
4. Get a cash back credit card
Understandably, some people don’t immediately consider using credit cards when brainstorming money saving strategies.
However, if you manage credit cards responsibly – meaning you only charge what you can afford and you pay off your balance in full each month – a cash back credit card can help you save on future purchases (through earning miles, points, and cash back).
If you’re planning to buy something, why not get something back in return? Use a cash back credit card for everyday purchases like food, gas, and utility bills. Some mortgage companies even allow paying with a credit card, although you might have to use a third-party service.
To protect yourself, though, pay off balances in full every month to avoid interest and long-term debt. Also, make sure you shop around. Pay attention to interest rates, how a program works, and annual fees.
Keep in mind that plenty cash back cards don’t have an annual fee.
Pay Yourself First FAQ
What does it mean to pay yourself first?
“Pay yourself first” is a simple financial principle that means setting aside a portion of your income for savings or investments—before you spend money on anything else. It’s like giving yourself a financial “paycheck” before paying your bills or buying things you want.
How do you pay yourself first?
To pay yourself first, treat saving money like a recurring bill. When you receive income, immediately allocate a portion—say, 10%—into a designated savings or investment account before covering other expenses. Automate this process, if possible, so that it happens effortlessly.
What are the benefits of paying yourself first?
Paying yourself first has clear benefits, such as the ability to build an emergency fund. Prioritizing saving a percentage of your income before covering expenses can ensure that you have funds readily available for unforeseen events like medical emergencies or urgent repairs. This disciplined approach encourages financial stability and reduces reliance on high-interest borrowing during emergencies.