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Financial Essentials: Pay Yourself First

I’ve talked before about how my parents were instrumental in setting me up for financial success.

One of the best and most important things they taught me was to pay yourself first.

“Do not save what is left after spending, but spend what is left after saving” – Warren Buffett

– My Parents

Great minds think alike…

This sage-like advice was exactly what I needed coming out of college, where my paychecks were bigger than at any other time in my life.

Without this advice, it would have been all too easy to take all that money and spend it on who knows what; going out to bars (well more than I already did), really nice clothes, a more expensive car and apartment, fancy vacations and lots more.

I know that’s what my closest friends did (and most still do).

For most people though, this isn’t easy advice to take. The consumer mindset is in everyone; it’s just something we’ve been conditioned and trained to partake in over our lives.

Paying yourself first can be tough to implement, so here are a few ways to get started, and set yourself up for greater financial success.

Open a Separate Savings Account

This should be one of the first steps you take; after all you’ll want somewhere to put all that money you’re paying yourself!

If you keep it in the same account that you get your paychecks or where you pay your bills from, it can be very easy to lose track of what money is for what. You could find yourself spending that too easily!

Make it a point to put this money into a separate account where the goal is to leave it alone each month and not touch it.

This can be the start of your emergency fund if you don’t already have one.

Opening another account can be as easy as calling or visiting your current bank and/or credit union and asking for another savings account (provided there are no monthly fees associated with it).

You could even open a free online savings account where you can get higher interest rates than most big banks offer.

Contribute to Your 401K

If you can manage to fit this into your budget from the start of your career, this can be a game changer.

Due to the magic of compounding returns, just putting anything in at a young age will help it grow to a significantly larger sum years down the line. Your future self will thank you!

If possible, at the very least you should look to see if your company has a 401k match.

Some companies will match as little as 1-3% of your pre-tax income, while others can be much higher.

At the very least, do everything you can to contribute at least the percentage that your company matches. This is free money!

In addition, by contributing immediately to a 401K, this money never even hits your bank account. There’s no temptation to spend money if it’s not accessible!

Start Small

A huge roadblock many people run into with saving is they believe saving is only worth it if you can save a lot of money.

This is not true!

Some people simply don’t have a high enough income to save boatloads of money at a time.

It’s completely fine, and very much encouraged to start saving whatever makes you feel most comfortable.

For some it could be as little as $10 a month you send to that separate savings account, or a small percentage of your income to your 401K.

Over time as you get more comfortable with saving, or if you find ways to trim your expenses or grow your income, that amount you put into savings can increase to $20, $50 or even $100 each month.

Before you know it your emergency fund will be fully funded!

Automate If Needed

Once you get your paycheck, if you have trouble putting in the time or effort to send money to your separate savings account, there is an easy way to fix that.

Automate the process!

Most employers will allow you to list several accounts to directly deposit your money. You could set up an automated amount of money to go to you separate savings account each paycheck so you don’t have to move it yourself!

Another way would be to set up that same automated process, but through your bank account and make it an automated transfer to your savings account.

Automating these transactions can be fairly easy, and save you a lot of time. This way you don’t even have to think about it!

401K contributions are also automated, as this is an extremely easy way to save and invest.

Invest

Lastly, if you already have a good sized emergency fund and are contributing heavily (or maxing out) your 401k you’ve likely got a good system going.

Pay yourself even more by investing that savings further.

Set up and fund a Traditional or Roth IRA, or even a Brokerage account. You can contribute up to $5,500 into one of the IRA’s and as much as you want into a Brokerage account.

These contributions can also be automated to make it even easier on yourself and ensure you get better returns over the long run than having it all sit as cash.

What I Did To Pay Myself First

After graduating college and prior to starting my full time job, my parents sat me down to help me create my budget.

As I had a good starting income, and basically no student loan debt, we worked out that I was able to contribute 10% to my 401k and an additional $250 to start up an emergency fund.

We made the $250 a specific line item in my budget, so the act of paying myself first was a literal one… I just had to send that money into my other savings account!

It made me happy to see that account grow and grow month after month due to the steady monthly payments into it.

Now, I’ve written about how I made the mistake of letting that account grow too much, but it’s hard to be too disappointed about it, especially knowing that there are much worse places where that money could’ve went.

Aside from my 401K auto contributions, I had nothing else automated.

Perhaps it’s because I’m weird, or a bit of a nerd, but I took enjoyment in moving that money and setting it aside every month. It was a point of pride each month I accomplished it, and watching the balance get higher always put a smile on my face!

Over the years, despite fighting lifestyle inflation, I was still able to successfully put this money aside (due to income increases as well) up until the moment I decided to contribute as much as I could to my 401k mid last year.

Everyone’s situation is going to be different, but as long as you can start by paying yourself some amount of money instead of spending it, you are on the path to financial success.

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What methods do you use to pay yourself first? Have you always done that? What amount and when did you start saving?

12 thoughts to “Financial Essentials: Pay Yourself First”

  1. In my opinion, this is the most important financial advice for anyone, whether they want to retire early or not. Unfortunately, it seems that most of America does not heed this advice.

    It all depends on the individual but I think automation would help a lot of people. As you said, you never see the money and thus aren’t tempted to spend it. For myself, I’m very disciplined and I look at my spreadsheet pretty much every day (also a nerd or just plain weird, haha). After I get paid (twice a month), I look at my budget/upcoming expenses and every dollar I don’t need is moved out of my checking account and into my brokerage account or Roth IRA the day after I get paid. I’ve already contributed $5,500 to it this year so right now all of that money is going into the brokerage account.

    I finally opened up the online savings account last week! I moved everything I had in my old savings account over to that and will now start to add to that account, starting with my next paycheck. Very happy that at least I’ll be getting something instead of the pennies I was “earning” at the old brick and mortar bank branch!

    1. Totally agree automation is essential for most people. Maybe for you and me and other hands on people who enjoy looking at our accounts all the time we can do it more manually, but that’s totally a personal decision.

      Nice on opening the online savings account! It is awesome already seeing the higher interest coming in!!

  2. Congratulations on stumbling on this essential principal so early on in life. Many people don’t discover this (if ever) until it’s too late.

    With today’s technology, automation is a must for setting up everything (from paying bills to investing). Money that never hits your account can’t be seen and therefore avoids the desire to spend it.

    1. Thanks! Yes I am extremely fortunate that my parents were financially savvy and shared that knowledge. And exactly! I encourage everyone I know to set up those auto transfers so they don’t get tempted to spend the money.

  3. I am so very glad that even though my parents didn’t directly teach me “pay yourself first,” from the start they made it clear that I should be contributing at least 10% of my paycheck to my retirement account. I’m contributing way more than that now but I’m glad I at least started with that as a non-negotiable.

    Not budgeting means I don’t do a lot of taking out additional savings up front, which I should probably be better at. But since I’m contributing so aggressively to my 401(k) and trying to keep my expenses each month as low as possible, it’s paying myself first in a very roundabout way 😂

    1. Ah yes that is great advice! Now that your student loans are gone that’s gotta feel great that you already have all those retirement contributions from years prior to build upon.

      Hey yes those 401k contributions are no joke and absolutely count as paying yourself first!

  4. This was the first lesson i learned from Richest Man in Babylon (solid starter PF book)…. It’s basic, but it’s the foundation for building wealth. If you pay others before you, you will never make any progress financially.

    Great Post!

  5. I’m so totally jealous you’ve been contributing 10% to a 401k right out of the box. If I had to do it over again I would have started contributing to my IRA in real numbers as soon as I had any extra money (about a year out of college), even if it meant slowing down my student loan repayment by a tiny bit.

    1. Yes I’m definitely fortunate my parents explained all that and helped me out. Otherwise I would have been clueless and likely just contributed the minimum to get my employer match.

      I do think contributing at least a little to retirement accounts is important while paying off student loans. It gives you something to build upon once those are completely paid off!

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