If you’re living paycheck to paycheck currently, or struggling to build wealth, there’s a high likelihood you can completely change your financial trajectory by simply paying yourself first.
To pay yourself first means to prioritize saving and investing over everything else. All other spending in your life takes a back seat. It’s both a tactical money move as well as a mindset shift that has proven to be successful for centuries.
You might be thinking… But I don’t have any spare money to save or invest!” Well, this post is precisely for you! Let’s first explain the ins and outs of paying yourself first, then we’ll address common concerns as well as how to implement changes in your life.
The Origins of Paying Yourself First:
I believe it was Chuck Norris who first coined the term “pay yourself first”. He said it while karate-chopping his financial advisor that was overcharging him on fees. Nah, just kidding. The exact origins of the phrase are unclear, but the concept has been around for centuries.
George Samuel Clason wrote a lot about paying yourself first in his book The Richest Man in Babylon, published in 1926. The book studies ancient Babylonians, as they were the first people to discover (and document) the universal laws of prosperity. Paying yourself first was the single most important money rule practiced, which helped poor people turn their financial lives around in order to live a life of abundance and wealth.
As it turns out, the cornerstone tenets of personal finance haven’t really changed in the last 4000 years. We can use the same principals today as the Babylonians used back then to save money, pay down debt, and build wealth. 😳 Pretty cool, hey?
Ps. The Richest Man in Babylon is still in print today, and one of the highest recommended self help books of all time! Borrow it from the library, or here’s a free audiobook version on YouTube.
How Pay Yourself Works:
There’s both a technical side as well a mindset shift that needs to take place. Both of these are crucial to successfully pay yourself first and reap all the financial goodness that comes with it.
The money mechanics are actually quite simple. As the name suggests, you simply pay yourself first, which basically means setting aside a portion of every paycheck for future wealth accumulation, before any of your other expenses are dealt with.
We’ll get into the specific accounts and ways you can implement this later on. But for now here is a high-level flow of the way money moves when you pay yourself first…
It’s all about your order of priorities… For people living paycheck to paycheck, they believe their living expenses are the most important thing in life. As soon as they get their hands on any money, it’s quickly given away in exchange for goods and services. They may have good intentions of saving “anything leftover”, but the reality is there’s usually not very much actually left at the end of the month, and often there’s nothing at all.
Conversely, when you pay yourself first, the highest priority is your own financial security. Saving in retirement accounts and stockpiling for emergencies is done before anything else.
As for the physiological side… Paying yourself first isn’t just about setting aside some spare cash each month. It’s about building a proactive mindset that prioritizes your financial future. This includes goal setting, contingency planning, and learning how to better handle money. The fact is, you deserve (and are completely capable of) building wealth. You just need to discover the right tools and systems to get the ball rolling.
Best Accounts to Pay Yourself First:
Back in 1894 BC, an average Babylonian would receive 10 shekels of silver for their work each month. To pay themselves first they would take one of those shekels and put it under their sleep sack for safe keeping.
Luckily, technology has changed!! Most of us get paid electronically these days and there are far better ways to save and invest instead of stuffing money under your mattress. Here are the easiest to go about it:
- Your workplace 401k plan: These accounts are set up to deduct money out of your paycheck for retirement before anything shows up in your checking account. The perfect pay yourself first strategy!
- Traditional IRA or Roth IRA: Contributing to these accounts is a more manual process, but you can easily set up automatic transfers the same day your paycheck lands. IRAs have special tax advantages that can greatly lower your tax liability over many years.
- High Yield Savings Account: If you have no savings currently, priority number one should be to build up an emergency fund. You can use a HYSA to do this, and keep that money in savings long term.
Every savings vehicle has unique tax features, rates of return, fees, etc. Eventually you may want to incorporate a blend of different savings/investment accounts which will give you ultimate flexibility in retirement.
But no matter which account you choose to pay yourself first with, be sure to make contributions immediately. The key is to make it automatic before those funds hit your account. Putting away money for YOU should come first before any expenses are paid. No exceptions.
Changing Your Money Mindset:
Turning “pay yourself first” from a catchy slogan into a lived reality requires a clear roadmap. And that all starts with defining your financial goals. Whether it’s saving up for a comfortable retirement, buying a house for your family, or achieving that dream vacation, setting SMART goals (Specific, Measurable, Achievable, Relevant, and Time-bound) gives you a clear target to aim for.
Saving money just for money’s sake isn’t a good enough reason. So spend some time figuring out your “why”. Then it will be much easier to pay yourself first.
Believing in yourself is an important component also. Lots of folks are skeptical that paying yourself first won’t work – because they’ve been on a treadmill for too long and they find it hard to believe there’s a safe way to step off. The truth is, everyone (including YOU) has the power to save money and build wealth in life. You deserve a wealthy life, but you have to be willing to make sacrifices to build it.
Lastly, making a personal commitment, or a promise to yourself, is necessary to stay consistent. Change takes a while to implement, and wealth takes a while to build. You can’t just try paying yourself first for a few paychecks and expect to be a millionaire all of a sudden. Compounding takes time, and the longer you stick to it, the more you’ll notice the results!
Benefits of Paying Yourself First
What awesome changes will you notice after you start to pay yourself first? Here are a few things you can look forward to:
Financial security:
- Save up an emergency fund: When you pay yourself first, you’ll always have cash on hand for emergencies. This stops you from going into debt or dipping into your savings account when unplanned expenses pop up!
- Pay off debt: No more minimum payments and kicking the can down the road. Paying yourself first will help eradicate your debt for good in short order!
- Hit your money goals: Both short-term goals (paying for vacations, buying a new car, etc) as well as long term goals (comfortable retirement) can be achieved easily when you automatically set money aside regularly.
Financial health and wellbeing:
- Reduce financial stress: Knowing you have built in savings means you can worry less, and don’t have to be anxious about your financial future.
- Sustainability: You’ll naturally develop more frugal habits, making your lifestyle more sustainable.
- More confidence and control: Taking charge of your finances puts you in the drivers seat, instead of always playing catch up. When you pay yourself first you will build self-confidence and have a clearer path to financial independence!
Remember, the benefits of paying yourself first go beyond mere math and numbers. It’s about living a life free from financial limitations and becoming a better YOU.
Common Concerns:
Here are some thoughts and common objections many folks have when they first learn about the pay yourself first concept:
“But I can’t afford to save”… While this seems like a blatant reality, the truth is most people have at least some wiggle room in their budget. The beauty of saving before spending is it forces you to get creative and come up with ways to make the strategy work. We’ll discuss some of these strategies more in the next section.
“What if I have debt?”… If you have debt, you need this strategy even more! Prioritizing paying off your debts (starting with the highest interest rate first) is the only way to get out. When you pay yourself first, you can apply all of that money towards your loan principal, reducing the interest you owe and saving you much more money in the long run.
“I need the money now to live.”… It’s true that living comfortably requires some immediate spending. But, you don’t need to make drastic cuts to pay yourself first. Start with saving a small percentage of your income and adjust your spending habits gradually.
“It’s too late to start saving.”… It’s never too late! Every dollar you save builds a stronger and more financially secure future. The longer you delay saving, the worse the problem gets. So start small, stay consistent, and you’ll notice the benefits soon enough.
Remember the mindset shift. To make the pay yourself first strategy work, you need to believe that you can do it. You really CAN do it!
How to Save More:
Saving more money isn’t rocket science. It comes down to either spending less (and saving that money instead) or earning more income (without inflating your lifestyle). Or, ideally, you could do both!
There are a ton of ways to cut expenses. To make the biggest impact, start by scrutinizing the highest spend categories in your budget. These are usually housing, cars, and food costs. After the big items, go down your spending list and challenge every single area you spend money. I bet you can find 3-4 things to do differently to save money, maybe more! Here are ~30 easy ways to save money starting right now if you need some ideas!
Remember, small savings add up! This new approach will build on itself over time, even if you aren’t an immediate super-saver.
As for earning more, we have access to something awesome called the gig economy! This lets us pick up jobs and make money quickly and easily, without any added skills. Finding a side hustle has never been more readily available, and you can earn upwards of $2,000 a month by picking up the right gigs.
Starting small, like picking up a single bartending shift per week at a restaurant could bring in meaningful money that can help you accelerate your savings. Earning just $100 a week adds up to $5,200 over the course of a year. That’s not chump change!
Other options to earn more include asking for a raise at work, upskilling, changing jobs, or taking on freelance work. Any extra income can be saved and invested to snowball your ability to build wealth.
All in all, paying yourself first becomes much easier when you can cut down some expenses or earn more income (or both!)
Supercharge Your Strategy Even Further:
If you’re new to saving money and budgeting, things might feel uncomfortable to begin with. But I promise you, it gets easier over time and eventually saving becomes second nature!
Automating your savings is the simplest way to save money without even thinking about it. Paycheck deductions, automatic transfers, etc. will make sure you are always paying yourself first and never forget to invest for the future.
Tracking your progress will really help too. Not only is it motivating to see all your hard work paying off, it’s fun to watch your net worth grow over time. Using a free app like Empower is a great way to track savings and net worth over time. Be sure to celebrate each milestone as you save more and more money!
Learning to invest wisely is super important also. It makes all of the dollars you save grow legs of their own and multiply without you putting in any work. If you’re new to investing, or need a refresher, we highly recommend you check out our beginners guide!
Pay Yourself First FAQ:
For a bit more context, here are some frequently asked questions about the pay yourself first strategy:
What percentage should I save from my paycheck?
That depends on your age and how much you currently have socked away for retirement. If you’re 20 years old, you thankfully have a long time horizon for investing, so saving ~15% of your income every single year will have you retiring very comfortably in a few decades. But if you’re 35 and have zero dollars saved right now, you’ll want to strive to put away at least 20%. Older folks who need to catch up on retirement savings might need to knuckle down and save even more.
What happens when you pay yourself first?
If you truly commit to the pay yourself first strategy, you will naturally start to stockpile and snowball savings. These savings can be used to pay off debt, build up emergency funds, or invest for retirement. There are also psychological benefits, like less money stress, boosted confidence, and more control of your financial future.
What is the 50 30 20 rule for budgeting?
It’s a way to divide your budget up to cover all your needs and wants in life, as well as put enough money away for retirement. Simply budget 50% of your income to cover necessities like housing, food and transportation. 30% of your income can be spent on luxuries like entertainment, hobbies or travel. That leaves 20% to build up an emergency fund and invest for retirement!
The Bottom Line:
Paying yourself first helps people get out of debt, build emergency reserves, and save more for the future. It’s as simple as transferring money into a saving or investment account the instant you get paid, before spending money on anything else.
If you commit to the pay yourself first concept, you’ll reap both financial and psychological benefits. Living a more financially secure and financially free lifestyle is within everyone’s reach. It all begins with paying yourself first.
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