Pay Yourself First

Paying yourself first is one of the keys to building your net worth or turning around your financial life. It is a key to milestone in a person’s financial journey. So what do all of these personal finances bloggers mean when they say paying yourself first?

What it Means to Pay Yourself First

Whenever you get paid your money will no longer all go straight to your checking account for you to spend. Instead a designated amount of money will automatically get transferred to a savings account, investment account or retirement account.

This is the core of paying yourself first. You will no longer save whatever is left over at the end of the month, if anything at all. By paying yourself first you will now proactively save and make your budgeted money last until your next paycheck. There are many reasons and many ways that this can be done.

Why Should You Pay Yourself First?

Paying yourself first has a lot of advantages. It makes spending your saved money harder. Often you’ll have to make an effort to transfer the money out of a savings account or sell investments in your investment account. This effort is often enough to get you to think twice before dipping into savings.

If the money is in a retirement account you’ll face a lot of penalties and taxes. The financial penalty here should be more than enough to stop you unless it is absolutely necessary. These barriers will hopefully allow you to keep more of your money in savings and decrease your unnecessary spending.

Paying yourself first sets you up for financial success. It allows you to prepare for larger purchases down the road. Need new tires for you car in six months? Pay yourself first to make sure the money is there when you need it. It will also help with longer term goals like retirement and a down payment on your first house.

How to Pay Yourself First

So how can you pay yourself first? You can set up an automatic transfer out of your checking account on the day of or the day after your paychecks get deposited to a savings, investment or retirement account. This can normally done through your bank or investment firm. If you want to contribute to a 401(k) to save for retirement you would do that through human resources or payroll at work.

Another option is to have your payroll or human resources department set up an automatic deduction that takes part of your paycheck and puts it in a savings account instead of dumping it all in checking. They may also be able to set up direct investments into investment accounts including taxable accounts and IRAs if you provide them with the correct information.

I pay myself first by using ING Direct’s Automatic Savings Plans to transfer money out of my checking account on my paydaus and send it to various targeted savings accounts. I also have automatic transactions set up for a taxable investment account and Roth IRA at Vanguard. All of these transactions come out the same day as my paycheck goes in which means I won’t be tempted to spend the money.

Do you pay yourself first? If so, what methods do you use to pay yourself first?

Like What You See?

Join the other readers who have signed up for our email newsletter! No spam, just periodic updates to help improve your finances!

About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. I’ve been sort of paying myself first. I put it into my various funds (wedding, car, medical, so on)and really try to keep the money the same. It does help that we’re paying for the wedding so I can’t change that amount (unless it is to increase it) without hitting the amount we want saved for it. After all that and bills and other necessities are paid, we also try to save even more money with whatever is left over. Doesn’t always mean we’ll get extra money or a lot of extra money but I feel that even $5 saved or put toward debt is worth it.
    bogofdebt recently posted..Absolutes: not always a bad thingMy Profile

  2. I have forced savings through work (my pension contributions are required, they come off before I get any $$, and I can’t touch them no matter what). Plus I also have automatic transfers to savings accounts, other retirement accounts, and education accounts for my kids.

    Our emergency cushion needs work, but retirement is looking OK for now.
    Kris @ BalancingMoneyandLIfe recently posted..Finding Civility in an Uncivilized WorldMy Profile

  3. Sigh…I have sort of been doing this, but because my income is all over the place I haven’t quite organized it in some sort of regular system yet. I just keep moving money around. I need to get a grip on that because I totally agree with you on this concept!
    Budget & the Beach recently posted..Lighten Up!My Profile

    • You don’t have to have an automatic system. You can still pay yourself first whenever money comes in. It just takes more willpower and effort.

  4. This is my next big goal after I’m debt free in a month. Specifically I want to save for a replacement vehicle so I don’t have to end up paying others’ interest on a loan. This is powerful if taught to young people.
    John @ Married (with Debt) recently posted..I Bought a Tablet (Which Makes Me a Jerk)My Profile

  5. Tackling Our Debt says:

    While I know I should be paying myself first, unfortunately I never really have. I am so focused on paying off debt first, which may or may not be the right way to approach it.
    Tackling Our Debt recently posted..Tips for Couples Traveling on a Tight BudgetMy Profile

  6. I FULLY agree with this! I’ve been paying myself for years and have built it up to the max IRA contribution! Do I miss buying a lot of unnecessary stuff – nope! The trick is to do it little by little and to never stop. Treat it like a bill!!
    MyMoneyDesign recently posted..Life Lessons I Learned from Super MarioMy Profile

  7. Yes! I set up a payroll deduction for savings (403B, IRA, Roth IRA). Savings is my number one financial priority. When I bought my first house in 1973, I set up a payroll deduction to accumulate my real estate taxes and annual insurance). I have had the savings habit ever since.
    krantcents recently posted..How’s Your Problem Solving Skills?My Profile

  8. This is difficult, especially for those on variable income. I like the concept, but I can’t have automatic payments coming out since the money often times isn’t there some months.
    Brent Pittman recently posted..Passionate Dreamers and Disciplined RobotsMy Profile

  9. I contribute to the 401k and it works very well. I don’t miss the money at all and my retirement fund is growing.
    Joe @ Retire By 40 recently posted..Hotel Cost Saving StrategyMy Profile

  10. I have been paying myself first for some time now. I automatically have money to into my IRA and into a few different mutual funds.
    Sean @ One Smart Dollar recently posted..Free $25 American Express Gift CardsMy Profile

  11. I always pay myself first. This is how I budget. Like you said automatic deductions are great. I get my 401k contributions, employee stock contributions, and roth IRA contributions automatically taken out of my paycheck/account. Then I pay myself (my savings accts) with a huge chunk of my pay and then leave the rest for budgeting and living expenses.
    From Shopping to Saving recently posted..Why I Love Having a Female BossMy Profile

  12. This is so true, many people should make this a ritual with any income they receive. I like having barriers to money because then it grows and I forget about it. 20% should be the standard pay yourself amount on any income you get, beginning with your first job. Most kids who finally get that first job, still live at home with mom and dad, so 20% should be a breeze.
    RichUncle EL recently posted..Top 10 things that Impede Money GrowthMy Profile

    • 20% is a good starting point but you can save even more if you really try. Retirement and multiple other goals can make that 20% seem awful small sometimes.

  13. I have to admit we have not been doing this as much as we should but that is changing. We are going to sit down this week and have a money talk and set up those automatic transfers. Thanks for the reminder about how important this is.
    Miss T @ Prairie Eco-Thrifter recently posted..Reader Question: How Much Money Do I Need To Buy My First Home?My Profile

  14. Since I live in the U.S., and am a salaried W-2 employee I cannot pay myself 1st – the government pays itself first through withholding. :(

    But I do pay myself 2nd! :-D

    I use automatic deposits to ING direct savings, and an IRA. I’m a big believer in automation, so I like to set everything up for automatic routing from my checking to savings,IRA, mortgage, car payment, etc… then I tweak when my income changes. The best thing is not even noticing the money leaving my checking account. My net worth builds every month without my involvement!. How cool is that?
    Joe Morgan recently posted..My Bank *Wants* me to Skip a Loan Payment?!My Profile

  15. Automatic deductions via my 401k is my current method. I still have some savings and need to implement another automatic plan to pay myself even more. Thanks for the reminder!
    Buck Inspire recently posted..Cut Your Losses Mark CubanMy Profile

  16. This seems to be a easy idea to grasp, but much more difficult to apply. When you have bad habits your whole life, changing the proves to be a challenge. I would like to see more of this financial education included in school at the high scholl level at a minimum.

    Thank you for your post, Lance.

Share Your Thoughts

*

CommentLuv badge