Why You Should Pay Yourself First

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People are constantly hounding you for money — utility companies, landlords, lenders, you name it. Any way you look at it, you get billed for things all the time. You probably even paid a bill today. When money is on the line, people can be downright demanding and even rude about asking for things. That’s just the way it goes. 

If others are so demanding about expecting you to make payments on time, why shouldn’t you hold yourself to the same standard? If you have to stop and think about the last time you put money into an interest-bearing bank account or retirement plan, something needs to change. 

If you rarely have money to make loan payments or think it will be impossible to afford a down payment on a house, you need to change the way you think about money and start paying yourself first. 

How to pay yourself first

Don’t overthink this concept: As the name suggests, paying yourself first literally means taking a portion of your hard-earned discretionary income and holding onto it — even if it’s just $1. 

Here are some of the things you can do when paying yourself first. 

1. Pay down debt 

This may seem counterintuitive. After all, isn’t paying down debt paying someone else? As it turns out that it’s not that simple.

In some cases, paying down debt (e.g., student loans) can yield a better return than putting your money into a savings or investment account. If you’re paying heavy amounts of interest each month, then paying down debt can be one of the best investments you make.

If you have enough money to do so, try to pay down your entire balance. And if you can’t pay down your entire balance, contribute as much money as you can.

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2. Put money into savings

If you don’t have any debt to pay off, then you should put money into a high-yield savings account (HYSA) or money market account

Start by saving at least six months’ worth of emergency savings to cover living expenses should you get sick, lose your job, or have to pay for an unexpected expense — like a car repair or new refrigerator. Saving money in an emergency fund can be a lifesaver, as it can prevent you from taking out loans to cover monthly expenses or going into credit card debt. 

Once you have an adequate amount of money in an emergency account, put some funds aside and build a separate savings account for medium- to long-term savings. This is something all smart savers do.

3. Invest 

Once you don’t have any debt hanging over your head and have a healthy amount in a high interest-bearing savings account. The next thing you’ll want to do is start investing

Taxable vs. tax-advantaged investing

Very broadly, there are two types of investment options: taxable accounts or tax-advantaged accounts.

One example of a taxable account is a brokerage account. This type of account can give you full access to the stock market, enabling you to buy stocks, bonds, mutual funds, ETFs, and index funds. However, you won’t receive any tax breaks for using this type of account. You’ll have to pay taxes on any capital gains or dividend distributions that you receive on an annual basis. 

A retirement account is a tax-advantaged account because you can receive tax protection. For example, if you open a traditional individual retirement account (IRA) or a traditional 401(k), you can receive upfront tax breaks and tax-deferred growth until retirement age. If you open a Roth IRA or a Roth 401(k), you won’t receive any upfront tax breaks but you can benefit from tax-free growth.

The more money you devote to saving for retirement when you’re young, the better off you’ll be when you reach retirement age — and the faster you’ll get there, too. 

Keep in mind that retirement age is just a number — and a mindset. It’s more important to think about how much money you’ll have in retirement than what age you’ll retire. 

The benefits of paying yourself first

Here are some of the top reasons to consider paying yourself first. 

The time value of money 

The money you collect today is worth more than its equal sum tomorrow because of its growth potential. This concept is referred to as the time value of money.

In other words, if you don’t pay yourself as soon as you get paid and plan on doing it in a few days or weeks, you’ll miss out on key growth opportunities. For example, the money may sit in your checking account — where you may spend and waste it — instead of going into high-growth vehicles.

Whenever you get paid, think about where you can put the money to achieve the highest return. Do this with a sense of urgency so that you don’t miss out on any opportunities to grow your money.

If not today, when?

It’s very easy to procrastinate when you get paid and say that you’ll put the money away tomorrow or the day after. But this may never happen.

Paying yourself first is partly about maintaining financial discipline. It’s about recognizing the fact all the rest of your monthly payments — from your mortgage to your phone bill — depend on you having solid financial footing. 

If you bottom out and start living paycheck to paycheck, you’re going to run into trouble eventually. 

When you pay yourself first, you can avoid this fate. So don’t feel bad about doing it.

The money will still be there if you need it

Here’s the thing about paying yourself first: Unless you lock your money into a certificate of deposit (CD), a bond, or a retirement account, your money should still be accessible. So if you ever run into a tough time and need to tap into savings to make a payment, you’ll be able to.

Of course, tapping into savings to pay a bill isn’t the best financial goal you can make, but it’s an option if required — and it’s infinitely better than using credit, pawning objects, or taking out a personal loan.

Remember that paying yourself first simply means maximizing your return and increasing your personal financial security

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Tips for saving more money

Here are some additional points to keep in mind when paying yourself. 

Get a side hustle

If paying yourself first every month is next to impossible, take a look at your unique skill set and look for ways to bring in more money on the side. You can potentially make more money to offset the loss of putting your paycheck into savings or investment accounts. 

For example, you might walk dogs, help local businesses improve their social media accounts, or make money filling out surveys using sites like Swagbucks or Survey Junkie.

If you’re in a position to start a side hustle — meaning your job allows it — then you should strongly consider this option. You could potentially make so much on the side that you can put money away and still have cash left over to spend freely. 

Set up automatic transfers

If you have enough money to cover monthly bills, then you may want to set up monthly recurring payments to an account you control. Do this from the money where you receive your direct deposit or paycheck from work.

In other words, consider allocating a portion of each paycheck into savings or investment accounts so that the money automatically gets withdrawn without you touching or even seeing it. You won’t notice the money’s gone and you won’t be in a position to interfere with it. 

When it comes to saving and investing, consistency is critical. It’s amazing how quickly money can pile up if you stick to a plan. For example, suppose you get paid weekly. If you put just $50 into savings every week, at the end of the year you’ll have $2,600 socked away without even trying.

Budgeting is critical 

If you’re having a hard time making ends meet, it may be time to take a hard look at your budget and identify your spending habits. 

Forming a budget involves analyzing your monthly cash flow, and identifying where your money is going on a daily basis. 

For example, you may find that you’re bringing in $3,000 per month in income but spending almost one-third of that on food. You may be able to cut that figure in half by using coupons, being smarter about what you eat and when and paying more attention to grocery store prices. 

After you form a budget, stick to a plan and put the money you save away for growth.

Check out our post about How to Stop Eating Out.

Don’t avoid paying bills

Here’s a disclaimer: The more you put away into saving and investing, the more you’ll want to do it. This can be an addictive process — especially when the money starts to pile up and you make some headway. 

At a certain point, you may want to scale back on your regular payments. For example, you may want to pay less toward a high-interest credit card or skip out on a utility payment until the following month.

There are consequences for missing payments and they aren’t pretty. If you stop paying for your cell phone, water, or electricity, eventually they will get shut off. Stick to your budget so that you know exactly what you have to plan for in the short-term.

You should also think twice about buying fancy or expensive items that don’t appreciate in value, like a new car. Do you really need a 2021 model or will a 2015 model suffice? Chances are your money may be better served in a savings or investment account.

Frequently Asked Questions

Are automatic payments a good idea?

Automatic payments can be a great idea, as they can help you avoid missing monthly payments while also ensuring that you remember to pay yourself every month. 

That said, monthly payments can also be dangerous. For example, if you tend to live paycheck to paycheck and have limited funds left over at the end of the month, you’ll risk bouncing checks or getting hit with overdraft fees. Avoid this fate by making sure that you have enough money in your account to cover your monthly payments.

Should I use a savings account?

A savings account is a great way to keep money on hand for flexible access. Everyone needs one. A savings account can provide a higher interest rate than a checking account and it’s more fluid than using a CD or putting money into a brokerage or retirement account. 

Shop around for a savings account that offers a high-interest return rate, strong customer service, and a user-friendly website or mobile app.

When should I start investing?

Only you and your personal financial advisor can determine whether it’s a good idea to start investing. However, the rule of thumb is to start investing once you don’t have any debt to pay off and you have at least six months of savings in the bank to cover unexpected emergencies. 

The Bottom Line

Ultimately, you’re on your own when it comes to creating and managing a savings plan. Nobody else will save money for you. 

Setting aside money is one of the most important things you can do in your personal finance journey. Of course, you can work with a financial planner to reach your savings goals. But at the end of the day, you’re on your own when it comes to managing and saving money. 

By adopting the pay yourself first mentality, you can put money aside for your future self — and that person will be incredibly happy you did.

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