Introduction

Why should I pay myself first? Well, if you regularly put a portion of your paycheck into savings, you might find yourself less tempted to splurge on unnecessary purchases. This habit can help you build a robust savings routine, preparing you for high or unexpected expenses. If you’re struggling to get into the habit of paying yourself first, consider these steps:

Assess how much money you have and plan your spending accordingly.

Create a strategy for managing your payments.

Develop a savings plan.

How a Pay-Yourself-First Budget Works

"Pay yourself first" means prioritizing savings by setting aside money for your financial goals as soon as you get paid. This way, your investment accounts—like a 401(k), IRA, or savings account—get funded first. After that, you can decide how to spend the remaining money. This budget method is low-maintenance because it doesn’t require detailed expense tracking. If you can save the amount you’ve set aside each month without incurring extra fees or debt, you’re on the right track.

For example, let’s say your monthly income is $5,000, and you want to save part of it. If you’re under 50, you can contribute up to $6,000 to your Roth IRA this year (or $7,000 if you're 50 or older). Save $4,000 annually for a home down payment, $200 per month for emergencies, and $100 per month for a vacation.

Why Is It Important to Pay Yourself First?

Imagine you’ve decided to put every penny toward paying off your mortgage as quickly as possible. Then, just as you finish paying it off, a tree crashes through your roof. If you have to use a credit card to cover the repairs, you’ll quickly find yourself back in debt, and it’ll be high-interest debt. This scenario illustrates why paying yourself first is crucial. It protects you from unforeseen expenses.

But paying yourself first does more than just provide a financial safety net. It also opens up opportunities. By keeping cash in your hands, you can earn returns over the long term, especially in growth-oriented funds. This approach is particularly beneficial for retirement savings or other long-term financial goals. Saving now is essential because you’ll need those funds later in life. Once you retire, your income stream stops, and you’ll have to rely solely on your accumulated assets.

Deal With Your Liabilities

Don’t forget about your existing financial obligations. If you’re carrying significant debt from credit cards or personal loans, it’s unrealistic to expect to start saving regularly until you address that issue. Compare the interest you’ll earn on your savings each month with the interest you’re paying on your debt. If the debt interest is higher, focus on paying it off first. Make sure the interest on your debt is lower than the amount you save each month.

Pros of Paying Yourself First

Compared to other budgeting methods, like zero-based budgeting, the pay-yourself-first approach requires less effort. You don’t need to meticulously track every expense or label each purchase. This method helps curb impulse buys by encouraging you to look at the bigger picture. When you prioritize saving over spending, you have less disposable income to waste, making you more likely to spend on what truly matters.

Setting up a pay-yourself-first system can be as simple as automating it. Arrange for pre-tax contributions to your 401(k) and set up automatic transfers from your checking account to your savings or IRA using a banking app or online banking platform.

Cons of Paying Yourself First

It’s not always wise to put savings ahead of other financial goals. High-interest debt, like credit card balances, should be paid off before making large purchases, such as a car or vacation. Consider treating debt payments as a form of saving to tackle this issue effectively.

Conclusion

The golden rule of personal finance is to pay yourself first. To achieve this, set aside a portion of each paycheck—$50 to $100, for example—and deposit it into a savings or retirement account. Save the designated amount first, then use the remaining money to pay bills and buy essentials. However, if you’re already in deep financial trouble, think carefully before saving more than you owe. A higher rate of return on your savings could make it worthwhile to prioritize saving, but balance is key.