How to Pay Yourself First

I’m sure you’ve heard the financial advice, “Pay yourself first.”  Many experts consider this to be one of the most important financial tips around.

But let’s consider what this financial advice really means. It refers to the practice of saving some of your income before you pay any of your lifestyle bills. Ideally, the money would be taken out of your paycheck before you ever see it and deposited into either a savings or investment account. The concept is, if you don’t have the money in your checking account, you are less likely to spend it.

It might seem that you could just as easily pay your bills and then save the money that is leftover, but in practice this doesn’t always work. Actually, from my experience as a financial planner coaching folks, it rarely works unless you are super disciplined.  What commonly happens is your lifestyle expands to the amount you bring in. You pay your bills and there is nothing left to save.

By paying yourself first, you’ll find that it forces you to adjust your expense lifestyle (provided you are not using debt to extend your lifestyle) and save money at the same time.

Using this process will help you pay yourself first:

Set up your automatic savings

You really have two options available to you. Either have the money taken out of your paycheck directly or have your checking account set up for an automatic payment to another hands off account.

• Many employers will allow you to have a part of your paycheck deposited directly into a separate account. This can be your 401(k) account (or similar retirement account), a savings account,  a non-retirement investment account of some sort, or a combination of accounts depending on your situation.
• If you can’t do this through your employer, you can also set up your checking account to auto-pay to other savings or investment account a set amount on a specific date every month.  Just be sure not to spend the money before your savings ‘bill’ gets paid.
• Keep in mind that you can do this with multiple accounts. If your employer can divert part of your paycheck to another account, they can break it up further and send part of your money to your checking account, part to an investment account, and another part to a savings account, etc.
• If you’re self-employed, then the method of auto-debiting your checking account is probably the best way to go.
• Word of warning…If you don’t have cash accounts to cover at least 3 months of your living expenses, you should focus on funding savings before you start investing outside of your retirement accounts. The recommended rule for how much you should  hold in savings is unique to you and your life goals, but standard practice is tohold enough to cover at least 3 to 6 months of your living expenses.

There are challenges: psychological challenges

Many of us feel like we simply don’t make enough money to save anything. This is rarely true. In reality, most of us simply have expenses that we’re not willing to do without.

• Examine your spending and see where you can free up some funds.
• If this is a real struggle for you, another solution is to start saving just an extra 1% of your income. It is unlikely you’ll miss 1% of your paycheck. The next month bump it to 2%. Keep increasing the amount for as long as you can. You’re doing pretty well if you can get up to 10%. You’re doing great if you can get up to 20% or more!
• Whenever you finish paying off debt, consider redirecting that amount you were paying each month to your automatic savings. Simply keep making the payments, only now you can make them to yourself.
• If you are struggling on how to implement this, work with a financial planner (preferably a qualified fee-only planner  that charges by the hour or project and does not sell products) to help you get this working the right way for your situation.

Paying yourself first is one of the greatest things you can do for your financial future. The key is to get the money out of your hands as quickly as possible or, ideally, keep it out of your hands in the first place. Save automatically and your financial future will be on track faster than you imagined!

In the comments below, tell us how you are “Paying Yourself First” or share a written commitment on how you are going to start doing this, now. Just make sure you get started today.