How to Pay Yourself First

Woman doing bills on the sofa
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When you’re learning to improve your finances, you often hear the advice “pay yourself first.” It’s great advice, but you might be unsure about what it means and how exactly to pull this off. The good news is it’s not that complicated, and once you get started you can let things run on autopilot.

The Basic Idea

So what does it mean to pay yourself first? The idea is to “spend” money on your goals before spending it elsewhere.

You make your goals a priority, which dramatically increases the likelihood of doing what it takes to reach those goals.

It might help to look at what happens when you pay yourself last: some people spend what they’re going to spend each month, and if they have any money left over, they save it (or worse, they find more things to spend money on). In that scenario, you’ll save money towards your goals if and only if you have money left over at the end of the month.

Why Pay Yourself First?

Putting your goals at the top of your priority list is a better idea. It’s too easy to find things to spend money on (many of the expenses in your budget are needs, but it’s awfully easy to come up with wants that seem like needs).

It’s also easy to forget to save for your goals. Life is busy. You’ve got great intentions, but after you pay the mortgage, phone, and all of your other bills, you need to put your energy into all of the other daily tasks of living – saving for a far-off goal does not have the same sense of urgency.

Month after month passes by, and you’ve missed several opportunities to save.

If you give your goals the same sense of urgency, you won’t forget (especially if you automate).

How to Pay Yourself First

The easiest way to actually pay yourself first is to fit your goals into your existing way of doing things.

For example, you might want to beef up your emergency savings fund start saving for retirement, or build up down payment funds for a house. How do you make sure it happens?

If you make a monthly budget, add a line item to your budget for each goal. Put your goals at the top so that you’re sure they get funded. If you don’t have enough money each month, something’s got to give (you can choose to skip your goals – but now it’s a conscious choice – or you can find other areas to cut).

If you pay bills automatically, set up an automatic transfer to a separate account (such as an online savings account, or a subaccount earmarked for your goals). You’ll grow accustomed to having the money leave your checking account, just like all of your other bills. “Out of sight, out of mind.”

If you get paid with direct deposit, see if your employer will split your pay among several accounts. The amount you want to save can go to a money market account that’s less tempting to dip into, while your monthly spending money will continue to go into your main checking account.

If your employer offers a retirement plan, sign up for payroll deduction into the plan. It’s the easiest way to keep your hands off the money and ensure that it goes where it needs to.

Just get Started

The most important thing you can do right now is start saving money for your goals – even if you can only afford to save a little. Forming the habit (and changing other habits) is the hardest step, so start small if you need to and increase your savings later. Over time, you’ll see how you can successfully save money, you’ll feel great about working towards your goals, and you’ll find it easier to juice up your savings.