You may have heard the importance of paying yourself first. But what does that really mean? Learn why it matters to pay yourself first, and how the practice can help you meet financial goals and milestones.
What is Paying Yourself First and Why Does it Matter?
Paying yourself first does not mean getting out cash from the ATM on the day your paycheck clears, or treating yourself to something special because of all the hard work you’ve been doing. To pay yourself first means to set aside a portion of that hard-earned paycheck in a savings account. This could be a traditional savings account, a retirement account, or any other type of savings (from a rainy day emergency fund to your special savings account for a vacation or a new car).
Bottom line: Paying yourself first is a better, more purposeful way to save money.
The tangible benefits are clear. It’s simply much easier to reach your $5,000 emergency fund goal when the $500 you save monthly comes out of your paycheck just as soon as you receive it. These emergency financing loans are more like a quick cash advance. If instead of paying yourself first you decide to wait until you have a chance to go over your finances just before the rent is due then it’s likely that the money you could have, should have moved into savings will have already been spent. If this happens month after month, then that fund or savings account just won’t grow as intended.
Money experts often recommend paying yourself first because they know how powerful this shift can be. When you pay yourself first — and meet your monthly or bi-weekly savings goal immediately — you get the feel good jolt of a job well done. This psychological pat on the back can help us change our behavior, motivating us to save rather than spend. As we get into the practice of paying ourselves first, we also become accustomed to meeting goals. This can boost confidence levels and reverse feelings led by money, or rather, a lack of money to take on a more productive mindset. In essence, when we pay ourselves first, we treat ourselves like we matter and are worth investing in and saving for; that’s a powerful message indeed.
It doesn’t matter whether you’re saving $500 or $50 a month; what matters is prioritizing the goals of tomorrow over the transitory stuff of today. When you do this month after month, you build up resiliency and self-reliance. And there’s the added bonus that now, when a minor emergency pops up, you’ll have the funds to pay for it and you won’t have to stress about borrowing or finding the money.
How to Pay Yourself First
Since you can set up automatic deposits to a savings or retirement account, the pay yourself first approach allows you to spend a portion of your money on your future before you spend it all on the present. To get started, simply set up a recurring transfer that goes from your primary checking account to your preferred savings account on the day you get paid. Once you set it up, your money will be transferred automatically and your savings will grow. If you prefer not to automate banking, manually transfer money to your savings vehicle once you’re paid.
Some people use this approach to fund their retirement accounts, while others set aside funds to improve their home, purchase a timeshare, or sock money away for their children’s college funds–or all of the above. No matter what your savings goals are, put the pay yourself first practice to work for you and you’ll see just how transformative it can be.