“Pay yourself first” is one of the first pieces of advice you will hear here from pretty much any financial advisor or finance blogger. It almost doesn’t even need to be said.
Unfortunately, most people in the United States don’t follow this tried and true advice. According to a recent survey, the median amount in an American’s savings account is only about five thousand dollars, a glaring indication that most Americans aren’t paying themselves first.
Why Should I Pay Myself First?
You should pay yourself first because Future You will thank you!
Future You will be able to live comfortably in retirement. Future You will have the money to take that dream vacation.
Paying yourself first gives you options and provides a secure retirement. It may take some sacrifice now, but even saving a little bit today can pay off significantly in years to come.
What Does Paying Yourself Mean?
Paying yourself first means setting aside a portion of your paycheck for Future You before paying your bills and making purchases.
Many people pay their bills and buy everything they want before even considering saving. By the time they get to it, there’s not enough left to save.
Paying yourself first is about flipping the script. Instead of prioritizing bills, prioritize savings.
How Should You Pay Yourself First?
The most tried and true method of paying yourself first is putting it on autopilot. Set up automatic transfers of your paycheck so they go directly into your savings, retirement, and brokerage accounts.
If your company doesn’t offer these allocations, have the money transferred directly from your checking account regularly, and budget based on the cash you have post-transfer.
Aim for a savings rate of at least 10%, but starting smaller is okay. Try making your budget work on 95%, then 90% of your paycheck, to get into the habit of living on less.
What Should I Do With My Paycheck To Me?
The best way to pay yourself is by contributing to some retirement account, especially if you have an employer match. However, it’s not all about retirement.
Put money into a savings or regular investment account so you have a rainy day fund separate from your retirement accounts. Use it to build your emergency fund so you never have to worry about a car breaking down or a layoff.
The main point is to put it someplace where you won’t accidentally spend it or include it in your monthly budget.
How To Start
To get started, consider your top financial goals and life priorities. You may want to save for a house, car, or even vacation. Maybe early retirement is your top priority, so you should invest in non-retirement brokerage funds. You may only care about a stable, secure retirement, meaning you should put most of your money into an IRA or 401K.
Your goals are personal, and everyone should use their paycheck to themselves how they best see fit.
However, that doesn’t mean you should blow it on random junk. Paying yourself first isn’t about spending fun money on video games, action figures, clothes, and restaurants. It’s not about short-term wants but long-term life goals.
Paying yourself first is a critical first step in achieving your financial goals.
How Do I Pay Myself First With No Money?
Unfortunately, some folks barely make enough to cover their expenses, much less pay themselves first. Understandably, people living paycheck to paycheck can’t put money into savings. How can you put money into savings when you can’t even afford to eat?
Consider your options before saying it’s impossible.
Dig into your budget a little before saying you can’t. Most people have a little fat they can trim. Sometimes, we aren’t fully aware of where all our money goes and are surprised to find small ways we can cut back.
Perhaps you can save a few bucks on your weekly dinner out by opting for cheaper restaurants, cutting sugary drinks out of your grocery list, or canceling the gym membership you rarely use.
If your budget is absolutely bare-bones, consider using coupons and cash-back apps on necessary purchases to find extra money.
Next, try to increase your income. Drive on the side for Uber, walk some dogs, or pick up odd jobs here and there to fill the gaps in your budget. Apply for higher-paying jobs, and look towards improving your skills to become more marketable.
If there truly is nothing left, there is help available. Government programs can help you pay the bills, and food banks can help keep your family fed. The next step is improving your situation to have money to spare with each paycheck.
Any small thing you can do to improve your current financial situation will have ripple effects for Future You. Aren’t you worth it?