You’ve heard the phrase “pay yourself first” before, right?
Are you doing it? Are you paying yourself first?
It’s one thing to agree with this idea in theory, but let me tell you from experience, it doesn’t magically happen on its own.
You’ve actually got to put it into practice. You pay yourself first by using the first dollars from your earnings and (before spending it on discretionary items) putting those dollars towards your current and future financial goals.
As I’ve said many times, this is accomplished most efficiently by automating and separating.
The pay yourself first concept is great because it helps us manage our finances in line with our priorities, and it helps us to be consistent in our efforts, regardless of our whims.
Doing the opposite of paying yourself first, paying yourself last (i.e. waiting until the end of the month to save), never works out in the long run because you’ll always find a way to spend all of your money. I tried the “save what’s left over” approach for years and it just doesn’t work out consistently enough to add up to much. I don’t see any financial gurus peddling the save what’s leftover approach. Although it would be novel.
Doing nothing at all doesn’t work out great either. Spending all of your money now and going into a little debt can be fun and all, but I want you to have some money set aside for when you’re done working. Not because I want you to get rich quick. But because I want you to be able to afford the basics of life when your body and brain can no longer be relied upon to provide that for you.
Here are some ways that paying yourself first can improve your financial life:
Want to get out of debt? Pay yourself first. That’s right. This concept doesn’t just apply to savings. You can and should think about debt (money that you previously spent) as being first in line when it comes to making payments. Setup an automatic payment to your creditor to get rid of your debt asap. Use a tool like the Tally app to help you out.
Want to have an emergency fund? Pay yourself first. Everyone needs an emergency fund to help them through a rough patch (i.e. car/house repair, unemployment, or major medical issue). Setup a direct deposit from your paycheck to your savings account and only stop the deposits once you’re comfortable with the amount in savings.
Want to have money set aside for a down payment or a vacation? Pay yourself first. Create a separate savings account for short-term savings needs, like buying a new car or paying property taxes. Start depositing or transferring money into those accounts automatically and only stop the transfers once you’ve reached your goal. When it’s time to take your trip or pay your taxes you won’t have to dip into debt.
Want to afford retirement one day? Pay yourself first. This is the biggie. Retirement is ages away for most of us. But we should all be getting ready for it. Luckily we have 401Ks through work and Roth IRAs available at any broker or mutual fund company where we can quickly set up automatic savings deposits. The earlier you start, the better off you’ll be when you can no longer depend on your body or brain to help you earn the money.
Want to give your kids some money for college? Pay yourself first. This is last on my list for a reason. Paying for your kid’s college is great, but it isn’t paying yourself first in the traditional sense. If you do decide to help your kids afford college, you should open up a 529 college savings plan and start applying pay yourself first principles to ensure you save the money.
Remember, it doesn’t matter how small of an amount you start with. Start with 1% of your earnings. All that matters is that you open those accounts (i.e. have the place to pay yourself first to) and then start the automatic contribution (no matter how small).
Are you paying yourself first? Could you better apply this principle to one of your financial goals?