If you’ve heard the phrase “pay yourself first” but have no idea what it means or how to do it, you are in the right place. We are here to help you understand why simple habits like this one can be wallet-changing. But first, let's go over what it really means to pay yourself first.
What does pay yourself first mean?
Simply, paying yourself first is when you set aside money for your financial goals before you spend money. Most people are accustomed to paying for needs, spending on wants, and only then saving money. But what if you started to pay yourself first, even before you paid your bills? One of the easiest ways to do this is to have money automatically go into an account that’s separate from the account you use to pay your bills. When you pay yourself first, you are prioritizing saving or investing for your future self before you spend money.
Why is it important to pay yourself first
When you make your financial goals a priority, it allows you to create and build healthy money habits. It’s easy to put off saving money until next time but so often, next time never comes. How many times have you said you’ll save money with your next paycheck? Or that you'll put money aside from your tax refund? Or perhaps start saving when you get a raise? Or overtime or bonus pay?
Normally, we get paid, pay our bills, spend on fun, then save what’s leftover. However, we set ourselves up for failure when we say “I’ll save whatever is left over.” Many of us also have the best of intentions by promising that we’ll save when we get our next raise, but we don’t. As our pay increases, generally, we increase our expenses, and lifestyle inflation sets in.
Setting aside money from your paycheck is important to reach your financial goals. Whether your goal is to save $500 for a weekend getaway or $50,000 for a downpayment on a house, paying yourself first is crucial. Your financial dreams and goals are worth achieving but you need a plan. Saving often and consistently is also the key to building wealth. When you pay yourself first you give yourself permission to then spend money guilt-free.
How do you pay yourself first?
If you agree that setting money aside is important, here are a few things you can do to pay yourself first.
Pay yourself like you pay a bill
We all know what happens when you don’t pay your electric, cable, or cell phone bill. They cut it off. You want to make sure that you have savings and investing as line items in your budget and treat them like a bill. Many times we treat saving as a discretionary item when we really should treat it as a priority. Saving money is no longer just a want, it’s a need.
Have your employer do it
One of the easiest ways to pay yourself first is to do it through your employer. You can save for long-term goals like retirement by contributing to an employer-sponsored retirement plan like a 401k, 403b, or Thrift Savings Plan. Talk to your payroll or human resource department and begin by investing a fixed amount or a percentage from each paycheck.
Did you know you can have your pay direct deposited to more than one account? Although this may not be an option for everyone it might be an option available to you. Just as you can have a fixed amount or a percentage contributed to a retirement plan, you can do the same for general savings. All you need is the routing and account number to your savings account and voila, just like that you can save money. This is also a great way to keep your bill money separate from money for your goals. Again, you can talk to your payroll or human resources department about setting up direct deposit.
Create multiple accounts
This might sound wild but having more than one bank account is a great way to keep money separate for each of your goals. Having a vacation fund separate from a new car fund is also an easy way to know how much progress you’re making. Can you imagine using money from the house downpayment fund to buy a new pair of boots? You probably won't want to do that!
Giving your accounts the name of your goals can also help keep you on track. There’s nothing wrong with wanting a luxury handbag but when you have to dip into your Hawaii vacation fund to buy it, you might think twice.
Can you pay yourself first if you are in debt?
There is great debate about whether or not one should save if you have debt. The answer will depend as not all debt is the same. There’s a difference between high-interest credit card debt and low-interest mortgage debt.
Another factor to consider is the length of time you would be postponing savings. If holding off on savings would allow you to get rid of all of your debt in less than a year that might be worth considering. However, if it’s going to take five years or more before you can start saving, perhaps paying off the debt a bit slower might be the right choice.
Now more than ever we know that even the safest of jobs are not as secure as we once thought. Imagine losing your income tomorrow, do you have an emergency fund that could carry you through unemployment? Many people are focused on increasing the amount in their savings accounts for peace of mind. While it’s recommended to pay off your debt as quickly as possible, having a cash buffer is important.
How to succeed at paying yourself first
Automate your savings
There is nothing like having systems in place to save ourselves from ourselves. When your paycheck hits your bank account it might be tempting to use that money for the latest gadget or the big blowout sale. I know, it’s tempting. However, setting up automatic withdrawals from your paycheck or from your checking account into a savings account will help you succeed at paying yourself first. It reduces the temptation to spend money that you have earmarked for saving.
Automate your investments
Paying yourself first isn’t all about saving money it’s also investing. Saving money is no longer enough to build wealth. A recent survey by Clever Girl Finance uncovered that 68% of readers are actively investing for the future. Saving for short term goals like vacations or a new car is great. For long-term goals like college funds and retirement, investing is key to build wealth over time.
Paying yourself first requires that you get intentional. Be specific about your goals and give your accounts names. When you name the savings fund, it will help minimize the temptation of dipping the account for an unrelated reason. Use tax refunds, bonuses, and other extra cash as opportunities to boost your savings or investment accounts. Remember, you can have direct deposits go into saving accounts too.
We have normalized paying other people and paying businesses before we pay ourselves. Your goals and dreams are a priority, so treat them like that by paying yourself first!