What Does It Mean to Pay Yourself First?

What Does Paying Yourself First Mean?

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. You can ensure you pay yourself first by 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 gives your savings and long-term financial goals like retirement the same priority as your day-to-day necessities. Instead of spending first and saving whatever is left over, you're elevating financial security to the same level of importance as your rent or car payment.

What to Save For

Your savings can go into tax-advantaged retirement accounts, 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 prioritizing 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 use 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

Start a habit of paying yourself first by following these basic steps:

1. Set a Regular Savings Goal

Review your budget and figure out how much of your paycheck you can devote to savings. Setting aside 10% to 20% of your paycheck is a good goal, but if money is tight, go smaller. It's important to be consistent and find a target you can stick with, month after month. As you go, look for ways to cut spending and increase your savings.

Tip: Consider aiming for the 50-30-20 rule: 50% of your income goes toward necessities, 30% to discretionary spending and 20% to savings or paying down debt. If you don't yet have a budget, it's a good place to start.

2. 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.

3. 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, helping you save more automatically.

4. 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 recurring transfers from checking to savings through your financial institution.

Learn more: How to Create an Automatic Savings Plan

5. Add to Savings Wherever You Can

Consider dedicating a percentage of any extra money you get to savings: cash 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.

Frequently Asked Questions

The Bottom Line

Savings are key to buying a home, weathering financial difficulties, meeting long- and short-term goals and retiring in comfort. Paying yourself first doesn't make saving effortless, but having the skills to save and grow your money can give you the resources—and the confidence—to take on life's big challenges. Knowing how to save successfully pays a lifetime of dividends.