What Does It Mean to Pay Yourself First?

Quick Answer

Putting your money into savings, retirement or investments before paying your bills and spending could help you stop living paycheck to paycheck and finally save toward financial goals. Automated retirement contributions and savings transfers can help.

Happy young woman reading positive bank statement at home workplace with laptop.

Are you a successful saver, or do you find there's never anything left at the end of the month to put away for a rainy day or retirement? According to a survey by Lending Club and PYMNTS, 64% of U.S. consumers were living paycheck to paycheck in December 2022, which translates to 166 million Americans struggling to save. If saving is a challenge for you, consider a tried-and-true formula for squirreling away money: Pay yourself first.

Paying yourself first is a financial principle that says you should contribute to saving for your goals before using up all of your money on bills and discretionary spending. Though many people use this strategy as part of an overall budgeting plan, you can try it out by simply setting aside a few dollars every time you get paid.

What Does It Mean to Pay Yourself First?

Paying yourself first means dedicating a portion of your income to savings or investments before you use it to pay bills or make discretionary purchases. Paying yourself first often means using automated savings or automatic paycheck deductions to route money into savings, retirement or investments without ever passing it through your checking account.

Paying yourself first lets you give your savings and long-term financial goals like retirement the same priority as your day-to-day necessities. Instead of paying bills first and saving the remainder, you're elevating financial security to the same level of importance as your rent or car payment.

Where Do You Save?

Your money can go into retirement savings, an emergency fund or savings and investments that are targeted toward financial goals like buying a home or funding your kids' college. Most experts recommend putting emergency savings and retirement first—at least until you've built up an adequate emergency fund and are solidly on track with retirement saving. If you have high-interest credit card debt, you might want to consider using some of your savings allocation to pay it down.

Why Should You Pay Yourself First?

Without a commitment to paying yourself first, it's easy to pay yourself last—or not at all.

You have bills, and creditors who are not forgiving when you miss or skip a payment. You need to keep the lights on and put gas in the car. Once your obligations are met, your remaining money can practically spend itself if you don't put controls in place.

Paying yourself first removes the temptation to forgo savings and spend until your money is gone. If your savings and retirement balances never seem to grow, this strategy may shift that dynamic. Saving successfully can also be its own reward. As your account balances rise, you may feel more motivated and less stressed out about your finances, which may inspire you to keep going.

How to Pay Yourself First

Paying yourself first is easy. Start a habit of saving (and budgeting) with these basic steps:

Set a Regular Savings Goal

Review your budget and figure out how much of your paycheck you can devote to savings. Setting aside 5% to 10% of your paycheck is a good goal, but if money is tight, start small. It's important to be consistent and develop a habit.

  • Consider using the 50-30-20 rule: 50% of your income goes toward necessities, 30% to discretionary spending and 20% to savings or paying down debt.
  • As you go, look for ways to cut spending and add to your regular savings.

Create Savings Targets

Your first priorities should be building up an emergency fund and saving toward retirement. You may also want to create sinking funds to save toward large expenses like vacations, a new car or home maintenance and repairs. Your bank or credit union may have a feature that allows you to split your savings account deposits between multiple "funds" within your account—or you can track targeted funds yourself in a budgeting app or spreadsheet.

Have Retirement Contributions Automatically Deducted

If you have a retirement plan at work, your employer can deduct a percentage of each paycheck and contribute it to your retirement account before you ever see the money. As a bonus, many employers match your contribution, increasing the impact of your contribution.

Use Automated Savings

Your employer may be able to split your paycheck direct deposits between multiple bank accounts, so a percentage of your money goes directly into savings every time you get paid. If not, you can set up automatic transfers from checking to savings through your financial institution.

Add to Savings Wherever You Can

Consider dedicating a percentage of any extra money you get to savings: gifts, bonuses, side income and tax refunds, for example. If you reduce your monthly debt payments by paying off credit card balances, direct the savings to—well, savings.

Paying Yourself Pays Off

Finally, resist the temptation to make unplanned withdrawals, so your savings and investments can grow. Saving toward retirement and building up a substantial emergency fund improves your long-term financial health; saving up for major expenses can help make big financial goals like homeownership or college possible.

Just as important: Knowing how to save successfully pays a lifetime of dividends. You're not only more likely to save the money you need to reach financial goals, but you'll also build confidence in your own financial skills. Often, financial health is what you make of it.