Pay yourself first: the crucial step to improving your financial game when it comes to saving money and reaching your retirement investing goals. I’ll dive into this simple strategy a bit further below.
Have you ever wondered why at the end of the month you have very little money saved?
Or maybe you were going to put money away in your savings at the end of the month, but then wonder why there is little to nothing to put away.
Both of these situations are pretty common, but there is a simple method to breaking this frustrating savings issue: pay yourself first.
These three words combined create a savings method that everyone should use, but it’s also overlooked or forgotten.
40% of people in the U.S. don’t have $400 set aside for an emergency, according to the Federal Reserve.
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The Basics of Paying Yourself First
“Pay yourself first” is a popular phrase and strategy in personal finance that means you are automatically designating money from each paycheck at the time it is received to your savings, retirement, health savings, or other avenues that help you build wealth.
The idea is that the money goes towards your financial goals first, before paying any monthly bills, debts, or using it for any spending.
Sometimes, the pay yourself first strategy may also be called “reverse budgeting.” This is because instead of prioritizing your money around bills and debt, it’s based on your retirement and savings goals.
Why Should I Pay Myself First?
Saving money can be TOUGH. I found it quite challenging a few years ago, so I totally relate with the statistic back near the intro.
Between all the expenses (utilities, rent/mortgage, debt, student loans, etc.) there never seems to be enough left to save.
But that’s why the pay yourself first method is critical.
Most people (myself included a few years back) try to save money last of whatever might be leftover, instead of a set amount first.
When you switch to the pay yourself first strategy, you have a much better chance to reach your particular savings goals and stick to it when you see progress.
But, here are a few a reasons why you should pay yourself first.
Teaches you how to prioritize your savings
Practicing pay yourself first, helps you change your mindset when it comes to money. It begins to establish good financial habits, that hopefully will ingrain in your mind.
You start thinking about money different and teaches you how to really be successful in your personal finances.
Builds your “life happens” fund
I’ve been calling emergency funds lately a “life happens fund” because not everything is an emergency, but there are expenses as life shifts.
But, when you pay yourself first, you establish a fund of money for the unexpected moments. You no longer feel stressed, worried, or need to go into debt to pay something.
Establishing a good investing schedule for retirement
Investing for retirement is also something that can get overlooked or mistreated. Yet, for your financial future to be in a great place, paying yourself first is another advantage.
By automatically contributing to your 401k or IRA, you are in a better financial position when you are ready to retire.
It keeps you constantly contributing, no matter where the market stands. This helps you stay consistent and ensure you get compounding interest to work for your advantage.
Helps you view finances differently
When you start building your savings and you see this method working, it revitalizes your entire view on finances.
I find it gives you more financial confidence in that you are in control of money, instead of money controlling you.
This can be a huge motivator and no longer will you be lumped into some of those dismal statistics about money.
How to Pay Yourself First
You are probably thinking, “Well duh, just starting putting money in your personal accounts first! It’s in the phrase!” But as simple as that might be, there are a few tips and steps to ensure you are successful.
1. Know what your expenses are
Like any part of good personal finance management, you should understand your monthly expenses. This lets you see how much per month you actually have to save before you get started.
This can help you see where you might be able to cut expenses to save more and the exact amount left you can divvy up in your “pay yourself first” plan.
If your monthly expenses are $1,200 and your take home pay after taxes per each month is $2,500, then you can pay yourself first $1,300 per month.
2. Create automatic transfers from checking to savings
I personally do not do this anymore because it’s become so natural for me to save, but I was automating when I first started.
Many banks allow you to schedule recurring transfers in some way between checking and savings. Then you can choose the specific amount you want sent automatically to your savings account(s) every pay period.
3. Participate in your company’s 401k plan
Get started with your company’s 401k if they have one and you are eligible to participate.
Money is automatically taken out and added to your 401k for you before you get your check, plus many companies offer the company match to a certain percent.
And lastly, there are tax benefits as well. That’s paying yourself first and then some!
4. Have a side hustle? Send it all to savings
If you have a side hustle that makes money or even any under the table jobs, try to bank most of it if you can.
I realize you might be using this money to get ahead on bills and any debt, but if you are in a decent spot send this one directly to that high-yield savings account.
If your side hustle is a business, then make sure to separate this income from your personal bank accounts. Saves you tax -time nightmares and hassles!
But I like to think of my side hustle income as almost non-existent right now. I never touch or use it, other than saving in my business bank accounts and paying any business associated costs.
Related: There are tons of side hustle ideas, but which ones can really produce a full-time income? We’ll explore this and more in this article.
5. Identify your savings goals and adjust
It’s important with personal finances to create a set of goals, short-term and long-term.
Even if your goals are very basic, knowing these and creating a plan will help you pay yourself first.
Plus, you may be saving for something more expense (like a house or car), so your savings rates may need to be adjusted or you may get more aggressive cutting expenses to save more too.
Being methodical with your approach will help you stay on the right track.
6. Saving money with debt is still important
Pay yourself first or pay off debt? There is different advice about this question.
I agree that you should be paying debt and extra towards it if your interest is quite high (like credit card debt for example).
But I also think it’s still important to save money as well.
I actually wrote about the saving money vs. paying debt conundrum I faced a bit more in-depth.
I’m not going to tell you what the right decision is for you specifically, but I think it’s important to do both, not one or the other.
7. Pay yourself automatically
Once you know how you want to pay yourself first, the amount, and what accounts — you can start to set some automatic withdrawals. Personally, I do this manually because I like a bit more control.
Besides taking advantage of a employee-sponsored 401k, a great way to start is to set up automatic transfers between accounts, which you can schedule for certain days and accounts.
You can also ask your payroll department to split your direct deposit between your checking and savings accounts. Most HR departments can do this for you and is less work for you to manage.
It took me almost four years of my professional working career to figure out the pay yourself first concept. It’s such a simple methodology to personal finances, but is so often overlooked.
The earlier you establish this strategy with your money, the better financial life you’ll have. But, the important part is: getting started now, is better than never.
As you started reading more financial blogs or books, you’ll probably come across the paying yourself first philosophy quite often.
I personally first read about it in Rich Dad, Poor Dad by Robert Kiyosaki and it has been a financial game changer for me over the last few years and it can be for you as well.Are you paying yourself first? If you have, how has it been a financial game-changer for you personally? Let me know in the comments below!