One of the oldest rules of personal finance is the simple admonition to pay yourself first. All the money books tell you to do it. All the personal finance blogs say it, too. Even your parents have given you the same advice.
But it’s hard. That money could be used someplace else. You could pay the phone bill, could pay down debt, could buy a new DVD player. You’ve tried once or twice in the past, but it’s so easy to forget. You don’t keep a budget, so when payday rolls around, the money just finds its way elsewhere.
And besides: What does “pay yourself first” even mean?
To pay yourself first means simply this: Before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account. The first bill you pay each month should be to yourself. This habit, developed early, can help you build tremendous wealth.
When you pay yourself first, you’re mentally establishing saving as a priority. You’re telling yourself that you are more important than the electric company or the landlord. Building savings is a powerful motivator — it’s empowering.
Paying yourself first encourages sound financial habits. Most people spend their money in the following order: bills, fun, saving. Unsurprisingly, there’s usually little left over to put in the bank. But if you bump saving to the front — saving, bills, fun — you’re able to set the money aside before you rationalize reasons to spend it.
“Paying yourself” doesn’t have any particular physical manifestations (since money is fungible), but it’s a mindset that says that if you want to save $X per month, you should pretend that each month, you receive a bill from your savings accounts/investments for $X, and you should treat this bill like any other bill (e.g. utility bills, apartment rent, etc) and pay it off.
In practice, this can be accomplished in several ways:
- An automated paycheck deduction that routes money to your 401k account.
- An automated transfer of $X from your checking account into your savings or brokerage account each month.
- An automated investment of $X into some investment (e.g. mutual fund / ETF)