How to Pay Yourself First

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How to Pay Yourself FirstPay yourself first.  I’m sure we’ve all heard it a million times.  It’s simple and to the point.  If you want to build up your wealth, you need to pay yourself first.

When I was a teenager, that mantra was something my grandfather used to preach to me repeatedly.  He was truly an inspiration to me – he retired when he was in his mid-forties and lived to be in his mid-nineties.  So when he would tell me something, I would pay attention.

But, I didn’t really fully get it.  Pay yourself first?

I mean I understood the idea that the more money you saved, the further ahead you would be.  However, if you had bills to pay, you had bills to pay.  You can’t just skip an obligation so you can be further ahead in your savings!

Unfortunately, I never asked him to go in deeper about the idea.

But as the years passed though, I finally got the message.  If you’re unfamiliar with the idea, it’s as simple as it sounds.

If you want to pay yourself first, that’s exactly what you need to do – put the money away before you spend it.  You’ll then need to figure out ways to make ends meet, whether it’s by spending less or making additional money elsewhere.

For most of us, when you’re working in high school or just out of college, it’s likely not going to be for a fantastic salary.  And that makes sense – you don’t have a lot of experience at this point, so it’s hard to command higher pay.

That makes it a little harder to pay yourself first.  It doesn’t mean it’s impossible, but it’s probably more difficult to make ends meet at that time.

However, if you start small and continue to grow your savings, your nest egg will grow into something substantial.

So how do you make that happen?


Pay Yourself First on a Small Scale

How to Pay Yourself First - Pay Yourself First on a Small Scale
A penny saved is still a penny earned!

The good news is that technology makes it easier than ever to pay yourself first.

Simple tools and services like Digit, Acorns, and Rize Money have started to become popular.  Digit, for instance, figures out an amount of money to save for you every day based on your income and spending and then automatically saves it for you.

Acorns takes a slightly different approach.  It rounds your purchases up to the nearest dollar and then takes the remainder and invests it in different exchange-traded funds (ETFs).

Rize Money is kind of twist between Digit and Acorns.  It routinely pulls money from your bank account to help you save for something (like a vacation for instance).  They’ve recently added the ability to change from saving to investing and it’ll put that money into Vanguard ETFs.

I like the idea of these services that are popping up and they could be helpful to a point, but know that you’re unlikely to get rich using them.

Besides that, Digit is now charging its customers $2.99/mo. to use it.  That doesn’t seem like a great way to pay yourself first!


Pay Yourself First on a Larger Scale

How to Pay Yourself First - Pay Yourself First on a Larger Scale
There’s never anything shady about money stacked in a briefcase, right?

However, there are some great ways to start paying yourself first on a larger scale.  Most of these can be automated as well.

The simplest of these examples are above-the-line deductions on your paycheck.  For instance, consider retirement vehicles like a 401(k) account (also 403(b) or 457 accounts).  The beauty of these accounts is that you just set your withdrawal with your employer and the amounts are taken out automatically from your paycheck.

This is the epitome of paying yourself first!  If you don’t see the money, it’s hard to miss it!

Once it’s in place, just forget about it.  I also love the idea of using a percentage instead of a specific amount to withdraw.  When you use a percent, you’re helping to cover yourself for salary increases and bonuses – as your pay increases, your amount contributed goes up as well.

I’m a big fan of the Health Savings Account (HSA) as well.  Similar to 401(k) accounts, the money is taken out as an above-the-line deduction on your check.  As an added bonus, HSA accounts currently provide a way to get a little more bang for your buck by paying for medical expenses out-of-pocket (when possible) and then reimbursing yourself further on down the line.

Automating money to come directly out of your paycheck is probably one of the simplest ways to pay yourself first.  That doesn’t mean you should just leave it though.  It’s a good idea to re-evaluate these type of accounts on a periodic basis to see if you can slowly up your contribution.

Depending on your salary, it might be tough to contribute a lot of your salary at first.  However, if you keep pushing yourself to live on just a little bit less, you can continue to save a little bit more… and that’s what grows into a lot more down the line!


Other Ways to Pay Yourself First

How to Pay Yourself First - Other Ways to Pay Yourself First
This’ll represent the magic of compounding interest – work for you?

Maybe you’re already maxing out the accounts we just talked about or you want to focus on other avenues.  Regardless of the reason, you should be looking to find other ways to pay yourself first.

And no matter what you’re thinking of doing, automation remains one of the best ways to make this happen.  If you don’t see the money in the first place, it’s a lot harder to spend it.

I’ve set up a number of automation rules in our lives over the years to move our money around in a quest to save more and more.

We have money that moves from our checking accounts to our savings accounts at our credit union a couple days after each payday.  Then Ally Bank automatically moves the money out of our credit union savings to our online savings account with them.  This means the money is being saved before we have a chance to even mess with it.

Additionally, I also have Vanguard pulling money out of my checking account a couple of days after payday.  Vanguard is then set to invest this money automatically into VTSAX within my Roth IRA.

And if you remember, I push ourselves to the limit on these transfers.  I overdraw my checking account by payday once or twice a month.  This isn’t because we don’t have the money, but rather because I want to make sure that paying ourselves first is the priority.

The final piece I do for automation is to have our mortgage payments scheduled to be paid from our checking accounts.  I don’t have many (if any) of our bills automatically pulled from our checking because I like to review them and make sure we’re not being overcharged.  It also gives me an opportunity to see trends in our spending.

However, our mortgages are fixed and I like to pay just a little bit more on the principal every month (more paying yourself first!).  This helped us pay off one rental property completely and sets us on track to do the same with our duplex and residence.

Obviously, the more you save, the further ahead you’ll be in the long run.  Compound interest really is magic and, with time on your side, it can catapult your wealth to much higher levels.

And I get it… if you’re not making a huge salary, you’re not going to be able to max out all the accounts I just mentioned.  That’s Ok.  Over time though, as you get raises, you should take some or all of that raise to increase your savings.

Don’t look back and wonder where all your money went.  Pay yourself first and put yourself on the path to financial freedom.


What are your strategies for paying yourself first?


Thanks for reading!!

— Jim

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10 thoughts on “How to Pay Yourself First”

  1. One of the additional ways I pay myself first is that any kind of reimbursement I get or anything I will throw it in a savings account and then put it on my mortgage or put it in a retirement account. Having enough slack in your cash flow can pay off dividends when you get some unexpected reimbursements or random checks for $5 or whatever. It all works in my favor.

  2. I pay myself first much the way most do, by having cash siphoned out of my account twice a month to various savings accounts the day that my paycheque goes in. I keep only $300 in my accounts which are to pay recurring bills like groceries and spending money.

    I also pay myself first by rewarding myself when I know I’ve done well in a month! If I haven’t done well, my punishment is I get only a couple dollars a day in spending money, so only get to buy cheap things like a buttered bagel, bulk snacks, and a cup of coffee, rather than the yummy and delicious salads I usually allow. Doh!

  3. I started contributing to my 401k right when I started working so paying myself first is a habit now. These days it’s largely automated. 401k contributions are automatically deducted.
    I contribute to our Roth IRA once or twice per year in a lump sum.
    The only really manual step is for the cash that build up in our saving account. I invest those whenever I have a chance.

    1. I like to hear about the 401(k) contributions even though you’re no longer working a 9-5. I’m excited to start that up as the income continues to increase with my blog over the next couple of years.

      — Jim

  4. Great article!

    My fiancée and I recently began maxing out my Roth 401k, as well as both of our Roth IRA’s. The automatic deduction from my paycheck makes the 401k very easy, and I never have to worry about it.

    Now that we are maxing out our retirement accounts completely, we recently (last month) opened our taxable account (Vanguard) and have set up automatic transfers from our bank at the end of every month. This money will be transferred to our taxable account and be invested in a Total Stock Market Index Fund.

    Paying yourself first through automation is a beautiful thing!

  5. Great article, great ideas and comments. To save for goals other than retirement, consider opening a new savings account (at a new credit union or bank) and using auto-transfers to reach your goal. The new account feels “off limits” because you’re not accustomed to using it for everyday expenses. Figure out the total saving goal and the date you want to hit that goal, and calculate the monthly target. Put a nickname on the new account to help visualize that goal each time you look at the savings account. Let’s say you want to save $12K over the next 4 years for a car down payment. You’d need to save about $250/month. If that’s too much right now, start with an affordable amount, say $60/month. Give yourself a target date for when you will be on your “savings stride,” maybe 18 months from now. You will make reasonable increases to your monthly auto-transfer, and put reminders on your calendar to help you stay on track as you gradually stair-step your way to $12K. In our example you might increase the transfer by $50 every 3 months, with calendar reminders every 3 months to match. You hit $260/mo at month #13, reassess your plan and decide to keep going up. Our example increases to $310 at month #16, and hits $12,000 in total savings at month #44. You reach your goal a few months early, starting at just $60/mo. Automating your transfers and calendar reminders are key components to success. Good Luck

    1. Great ideas, John! We’ve been using an online savings account at Ally, which has made it even easier to put a little distance between us and the account since it takes a couple of days to transfer money out.

      I like the idea of making periodic increases as well. If you keep them reasonable like you suggested, you probably won’t even notice it out of your pocket.

      — Jim

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