What Is Pay Yourself First?
"Pay yourself first" is an investor mentality and phrase popular in personal finance and retirement-planning literature that means automatically routing a specified savings contribution from each paycheck at the time it is received.
Because the savings contributions are automatically routed from each paycheck to your savings or investment account, you are "paying yourself first." In other words, paying yourself before you begin paying your monthly living expenses and making discretionary purchases.
Key Takeaways
- "Pay yourself first" is a personal finance strategy of increased and consistent savings and investment while also promoting frugality.
- The goal is to make sure that enough income is first saved or invested before monthly expenses or discretionary purchases are made.
- Data from the federal reserve shows that most Americans do not have enough money saved, either for retirement or for near-term emergencies.
The Basics of Pay Yourself First
Many personal finance professionals and retirement planners tout the "pay yourself first" plan as a very effective way to ensure you continue making your chosen savings contributions month after month.
This suggestion hinges on the fact that It removes the temptation to skip a contribution and spend the funds on expenses other than savings. Regular savings contributions can go a long way toward building a long-term nest egg, and some financial professionals even go so far as to call "pay yourself first" the golden rule of personal finance.
If you are using the "pay yourself first" method of personal finance, you may opt to put your money in a range of savings vehicles, depending on your financial objectives. The phrase can refer to earmarking a certain percentage of your paycheck to be contributed to your retirement accounts, such as a 401(k) or an IRA.
Alternatively, you may put the funds in a cash savings account. "Paying yourself first" simply involves building up a retirement account, creating an emergency fund, or saving for other long-term goals, such as buying a house.
Financial advisors recommend measures such as downsizing to reduce bills to free up some money for savings.
Do Americans Use Pay Yourself First as a Financial Strategy?
Research on savings indicates that a relatively small percentage of Americans follow the "pay yourself first" adage. In fact, the Federal Reserve reports that in 2019 (the most recent figures available) less than 40% of Americans could not cover a $400 emergency in cash.
The advantage of "paying yourselffirst" out of your paycheck is that you build up a nest egg to secure your future,and create a cushion for financial emergencies such as your car breaking down or unexpected medical expenses. Without savings, many people report experiencing a large amount of stress. However, many people claim that they simply do not earn enough money to saveand fear that if they start saving, they may not have enough money to cover their bills.
Special Considerations
It's also important to know that money set aside for retirement, especially in a Roth IRA, is accessible if needed. Fear of having no money in emergencies is no reason to refuse to benefit from tax-advantaged retirement savings plans.
FAQs
When you pay yourself first, you pay yourself (usually via automatic savings) before you do any other spending. In other words, you are prioritizing your long-term financial health.
What is the purpose of paying yourself first? ›
"Pay yourself first" is a personal finance strategy of increased and consistent savings and investment while also promoting frugality. The goal is to make sure that enough income is first saved or invested before monthly expenses or discretionary purchases are made.
How does paying yourself first can help you achieve your savings goal? ›
The pay yourself first budgeting method can help you grow your emergency fund to have a financial cushion for unexpected expenses. It helps you make steady progress toward your savings goals. Saving for a short- or long-term goal can be challenging if you have to remember to set money aside every time you are paid.
What does it mean when you pay for yourself? ›
It's the golden rule that will set you apart from people who are just scraping by from month to month: Pay yourself first. It means setting aside a realistic portion of your income every time you get a paycheck and before you start spending it on anything else.
What does the principal of pay yourself first mean that you should? ›
Many older students are employed, and their paychecks reflect their net income after taxes (disposable income). “Paying yourself first” means saving before spend- ing on consumer goods.
What are the cons of pay yourself first? ›
Cons
| Pros | Cons |
|---|
| Easy to automate | May not work if you have too much high-interest debt |
| Trains you to live within your means | Risk of overdraft if you put too much in your savings account and not enough toward everyday expenses or your emergency fund |
1 more rowOne of the most common types of percentage-based budgets is the 50/30/20 rule. The idea is to divide your income into three categories, spending 50% on needs, 30% on wants, and 20% on savings.
What is the golden rule of saving money? ›
According to Priti Rathi Gupta, Founder of LXME, as a salaried woman, you can follow the 50:30:20 Rule, which is the golden rule of budgeting. It is a great idea to start with which allocates 50% of your income to needs, 30% to wants, and 20% to savings and investments.
Why is it important to set financial goals for yourself? ›
Financial goals are important because they can help fund your lifestyle, helping you meet both personal and professional objectives.. It's helpful to divide them into short, medium and long-term objectives.
What is the purpose of a savings goal? ›
Saving means keeping some income to buy things in the future. It is a really good idea to save for the future. A savings goal is something that you are saving to have in the future. People have lots of savings goals—they save for emergencies like fixing a broken car, or for big items, like a new refrigerator.
How to Send Money to Yourself
- Bank account transfers. A bank account transfer is an accessible way to send money to yourself at your bank office, at an ATM, or online. ...
- Digital & mobile wallets. Mobile wallets offer more flexibility when it comes to moving money between your own payment accounts. ...
- Card to card transfers.
Going Dutch(sometimes written with lower-case dutch) is a term that indicates that each person participating in a paid activity covers their own expenses, rather than any one person in the group defraying the cost for the entire group.
What is an example of paying yourself first? ›
One way to pay yourself first is to set up a split deposit, which is when a part of your paycheck goes into a savings account and the rest goes into a checking account. If you want to set up a split direct deposit, first check if your employer offers this option.
What does Robert Kiyosaki mean by pay yourself first? ›
The goal is to pay yourself first and always to have money to invest. Once you have money for investments, you should learn about assets worth investing in so that your money grows faster than the inflation rate. As always, we suggest you conduct due diligence before investing your hard-earned money.
What does it mean to pay yourself first Dave Ramsey? ›
You pay your mortgage lender. You pay the electric company. You pay the trash collector. But do you pay yourself? One of the most basic tenets of sound investing involves the simple habit of “paying yourself first” – in other words, making your first payment of each month a deposit into your savings account.
What is a major benefit of the pay yourself first strategy Quizlet? ›
What is a major benefit of the Pay Yourself First strategy? It encourages you to prioritize saving money.
What does the concept of paying yourself first involve quizlet? ›
paying yourself first means: putting some of your income into a savings account before paying bills, buying personal items before paying bills.
What does the principle of paying yourself first mean quizlet? ›
The principle of paying yourself first means that you should set aside the money necessary for achieving personal goals before you spend money on non-essentials during the month.
