You have to pay yourself first.
This is my go-to personal finance tip. This is advice that’s been preached by some of the most reputable personal finance bloggers and money management experts. This is the advice that I used to save $25k by 25 (and much more in investments).
What’s pay yourself first all about? Why should I care about paying myself first?
Excellent questions. Let’s proceed with the tactical stuff.
How can you try it?
You go to your employer or bank and ask them to deduct X amount off your paychecks. You then ask that this money is put away and that you can’t access it.
The only way that the pay yourself first tactic can work is if you have separate bank accounts. Keeping all of your money in one checking account will not work,.
The money needs to be as far away as possible from you. As soon as you receive your paycheck the goal is to set aside a specific amount for bills and to “pay yourself” a portion (I hate percentages and rules of thumbs) into either a separate savings account or any other investment vehicle that you use.
You should have an online savings accounts that’s connected to your checking account. You should also put away an amount that you’re comfortable with so that you don’t have your entire check gone.
[You need to sign up with Capital One 360 for this right now! You also get $50 for free.]
These online accounts create an automatic barrier: transfer time. Most online accounts will also allow you to order online cheap checks for when you need access to them.
How much do you save?
This depends 100% on your income vs expenses.
First thing you need to take care of is to ensure you’ll have enough cash on hand to pay your bills. If you have more expenses than income, you may have a slight problem.
Then after you’re bills/expenses (i.e. cell phone, gym) are accounted for, you need to consciously plan how much money you want to save and how much you want to spend on yourself for the pay period.
There will be times where you want to save everything because you don’t have anything coming up. There will also be times where you have many purchases coming up and you can only pay yourself first a small amount.
I suggest starting off with $50 every two weeks and moving up rapidly from there.
The key ingredients of the pay yourself first tactic are flexibility and conscious planning.
You need to be flexible because your income vs expenses will always be shifting. There’s no set amount that you can spend in a 1-2 week period because that’s just now how life works. You need to plan consciously because if you pay yourself first your whole paycheck, you’ll only lie to yourself and deprive yourself out of all of the fun in your life.
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Let’s take a step back. What are the benefits of this system?
Too often savings are neglected until it’s too late.
It’s easy to say that you’ll go out/make a few purchases and then save the rest of your income as your paycheck day fades into the dust. The reality is that the extra cash in your checking account ends up getting spent long before you have the opportunity to save it or transfer it into another account of yours.
Screw paycheck to paycheck life.
Living paycheck to paycheck creates way too much stress.
If you save even $50 when your paycheck comes in, you’ll be on the right track and be slowly but surely getting ahead of your friends. The reason that many folks live paycheck to paycheck is because savings come last. Bills are paid, main expenses are covered, and then the entertainment comes in. The problem is that by the time the thought of saving money comes into play, it’s usually too late and the wait for the next paycheck begins. Don’t let this happen to you. Pay yourself first (even if it’s a minuscule amount, who cares).
It works.
This really does work. This money saving strategy isn’t iffy or subjective at all. You save your set amount of cash first and then you spend money on whatever else you want to.
Give the pay yourself first tip a try.
What do you have to lose? If you do try it or have tried it, then please share some thoughts with us below…
This is exactly how my husband and I can do what we do on a teacher’s and office worker’s salaries. At the beginning of our monthly billing cycle, we have an automatic transfer set up to fund all of our savings goals – Emergency fund, Tax and Insurance account, Roth IRA, Stock account, Graduate school, Auto and Home account, and our Vacation account.
This works best if you have stable expenses and always have a cushion in your checking account for unexpected expenses later on in the month – in our case, we leave $1000 padding at all times.
One of my blog posts shows our entire monthly budget and right at the top is the seven different accounts that automatically deduct a total of about $2100 from our ING Checking account into our ING and Smarty Pig accounts. We live on the other 60% of our take home pay.
Our hope is that a combo of this system and several healthy retirement accounts will lead to retirement at age 52 (when my husband can get his full pension).
We’d never be able to pull it off if we didn’t pay ourselves first.
You’ve completely mastered the pay yourself first strategy! I thought I was okay but you blow most of us away. Good stuff.
Just curious– how do you factor in extra income/cash that comes your way?
This is all based on what you’re comfortable with…
This is my own personal situation: I built a small emergency fund (for which I can’t remember the amount). Then I contributed to my 401(k) to get my company match. I saved a LITTLE (about $10/month) into my online savings. And with everything else, I punched and kicked away at my debt.
Thanks for the advice – I have been saving a small amount every month (about $30) and that seemed so insignificant, I wondered if it were worth it. But now I know that I’m not alone! Will continue to punch and kick at my debt – like in a video game.
PS Worst idea for a video game ever!
Leah there is no one size fits all advice when it comes to paying off debt. My best advice would be to first build up a solid emergency fund that you feel comfortable with. This may seem counter-productive but if anything were to happen in the near future (hopefully not) you wouldn’t have to use your credit card and rack up more debt.
I could discuss this until I’m blue in the face but I think you would benefit from reading this article:
https://studenomics.com/debt-reduction/what-is-your-debt-elimination-plan/
I hope that helps. If not you can always email me through the contact page.
Hey Martin,
Nice article. I’ll be joining the bandwagon with my new job. The majority of my checks are gonna be to knock that credit card bill down (oi vey), but I plan to be putting away a good portion to save up for things like tuition (hahahahahahaha) and just life in general. I may not have as much money left as I’d like to spend, but then again I don’t really need to go out and spend just ’cause I can.
My husband and I try to manage our money but it’s so difficult. It’s really hard when I only get paid once a month for teaching (at the end of the month), and he gets paid every week as a customer service analyst. All expenses seem to accrue at the beginning/middle of the month. We already have extra savings accounts, online ones because those take the longest to access. We only have access to one debit card each and try to deposit our money in small faction in several accounts. Husband and I also opened our own IRA retirement accounts which are locked under penalty, so we slowly add to them when we can ($25-50 / month). However, with my student loan debt looming over us (me), it’s hard to imagine that I will ever be able to pay it off. I have quite a large debt (husband is from another country who received a full ride) and I currently have the 25-year payment plan. We have a young daughter and don’t want to be paying on my loan still when she’s in college one day (We also have a small college fund started for her). It’s really stressing me out but we are trying our best! I just wish there was something more we could do!
Hey Shannon. I totally understand your frustration. It sucks when you’re in debt. It feels like the debt is strangling you. I’m going to send you an email with my premium guides. Check your email!
People say they don’t save enough money for retirement, or invest enough, or save a big enough emergency fund, because they don’t have the money to save more.That’s why personal finance advice says that you should pay into those accounts FIRST. Treat it like a bill. Approach it the same way that you treat your phone bill or your electric bill.