Pay Yourself First
Are you paying yourself first?
What is Pay Yourself First?
Pay yourself first is a financial strategy in which you put money into savings before paying any other expenses.
This might sound crazy to you, but paying yourself first helps you to prioritize savings, just like you would any other expense.
How do I Pay Myself First if I can’t save money?
First, I’ll caveat this by saving, if you work a minimum wage job and live paycheck to paycheck, paying yourself first probably isn’t going to work for you. In order to pay yourself first, you must first be able to cover your basic necessities like rent, bills, and debt payments.
However, for the majority of us, there is room in the budget for savings, it just might require a mindset shift to learn where.
Many people fear that if they save first, they won’t have enough money to cover their regular monthly expenses. However, this is almost never the case. Due to lifestyle inflation or lifestyle creep, we tend to see money and spend money. As our income increases, so do our expenses and we start to justify what we “need”. We think we have no money, but forget that most items we spend money on are not truly needs.
Instead of imagining all the things that you can’t buy, imagine you had a bank account with enough money that your car engine could die and a tree could fall on your roof all in the same month and you had enough money to pay for both. Having an emergency savings account reduces so much stress in our lives, because we no longer have to worry about being able to afford an emergency.
Benefits of Paying Yourself First
My husband and I are polar opposites when it comes to our spending and savings tendencies. If he sees money in his account, he’ll spend it. $200 sitting in the checking account = trip to Target. I, on the other hand, want to hoard all of my money in my account in case that one-in-a-million emergency expense happens this month. $200 sitting in the checking account = not nearly enough to cover the emergency room bills if I’m in a serious car accident while driving to work!
The good news is, paying yourself first helps us both.
Paying yourself first means 1) you have less money sitting in your checking account to spend, 2) more money saved up for emergencies, retirement, or even vacations. After paying yourself first, you know your basic savings are covered, and you’re free to spend what’s left.
But what if I really want ___?
You might also be thinking that putting money into savings means denying yourself things that you want, but even if you don’t realize it yet, I guarantee you want a secure retirement. Paying yourself first isn’t about restricting yourself, it’s about prioritizing future-you’s financial well-being. Think of how good it will feel when you don’t have to think twice about an expensive health exam that your doctor says you need. You already have the money in your emergency savings, so you can prioritize your health.
How to pay yourself first
For many people, when they decide they want to make a change in their life it’s “go big or go home”. Statistically speaking, this is never going to work. When we make huge life changes (like going to the gym every single day when we never went before, or cutting out all sugar when your nightly bowl of ice cream makes your whole day better). Making small, tiny changes in your life helps you incorporate them into your daily schedule and makes you more likely to keep them.
So, start small. Transfer $20 per month to your savings account. You probably won’t even notice that you don’t have an extra $20 to spend. Over time, slowly increase the amount until you hit your ideal savings rate. Remember, it’s not about denying yourself the money to buy things, it’s about prioritizing emergency savings, retirement, buying a house, or other long term savings.
But what if I have an irregular paycheck?
You can still pay yourself first, even if you have an irregular paycheck (gig work, shift work, own your own business, etc.)
First, you’ll want to figure out your bare-necessity expenses (rent, utilities, groceries). Then you’ll want to figure out what the absolute minimum you will make every month may be. The difference goes into savings.
For example, if you will make at least $3,000 every month and your bare minimum expenses are $2,500, then you have $500 to put into savings. Set up a savings transfer for $500 every month.
Now, if you make more than your minimum $3,000, decide on a percentage you will save and a percentage you will spend.
For example, this month you make $5,000. You’ll save the regular $500 that you save every month, but now you have an extra $2,000 above your minimum. You can split it 60/40, sending 40% directly to savings ($2,000 x 0.40 = $800) and keeping 60% for discretionary spending ($2,000 x 0.60 = $1,200). This system allows you to establish a bare minimum for months you make less, and allows you to both save and spend more in months that you make more.
Tips for Success
Before you start saving any money, you need to know what you’re saving for. “I should be saving more” isn’t a good reason. “I want to save 6 months of living expenses in an emergency savings account” is a better reason. Remember, you’re prioritizing your long term financial health.
Set up automatic transfers. No matter how strong you think you are, if you manually transfer money to your savings odds are you’ll 1) forget, or 2) rationalize why you don’t have enough money to save this month (trust me, you’ll think of something!). Automatic transfers take the guesswork out.
Final thoughts
Paying yourself first may seem like an impossible task, but it is one of the most important parts of building wealth. Whether it’s saving for retirement, making an emergency savings, or saving for fun things like a vacation or a new computer, we all need savings to help get us through life.
Action Items:
Decide why you want to save money. Do you want to start saving for retirement? Build an emergency fund? Go on a trip to Paris? Knowing what you are saving your money for makes it much easier to stick to your plan.
Decide how much money you can realistically save each month, then set up an automatic transfer.
Want to start saving for retirement, but you’re not sure where to start? Check out my post “What Types of Retirement Accounts Are Available to Me”?
Your life may not be perfect, but it is imperfectly yours. The only way to live it is your way.
