This is one of the most important but often forgotten principals of Personal Finance. Paying yourself first is often misunderstood, and unless you’ve read on the topic before, it’s kinda confusing what exactly this means. Let’s talk a bit about what it even means, and why you absolutely need to be doing this!
So what does paying yourself first mean?
Let’s immediately get one thing straight. Paying yourself doesn’t mean going out and spending money on things you want. Quite the opposite actually.
This phrase means that, whenever you earn money (from a day job, side hustles, etc), the first thing you should do is pay towards your savings and retirement accounts first before spending that money on anything else!
Some examples are
Paying yourself first should be done before even paying for your utilities, rent, mortgage, etc. Now you’re probably wondering “wait, what if I don’t have enough left over to pay for my necessities?” We’ll talk about that in a bit.
I don’t have enough to pay myself first
This is the most commonly used phrase when people don’t pay themselves first and there is a simple reason for this. When looking at the typical spending behavior of most people, here’s how they prioritize their spending instead:
1. Money hits their bank account
2. The first thing most people do is to buy things they don’t need. Like a new gadget or fashion
3. They pay their rent / mortgage, utilities, and food
4. Whatever is left over is used to pay down debt
5. If anything is left over, it’s invested into retirement accounts and an emergency fund
There is a huge glaring flaw in doing it this way. Do you see it? Notice how paying yourself first is typically at the bottom of the list? This is why so many people have the response “I don’t have enough money left over to invest and save for retirement”. The truth instead is that they aren’t prioritizing paying themselves first.
What to do instead?
So now that we’ve talked about what it all means, and why so few do this, there are several strategies you can put in place to start paying yourself first. The most important investment you’re ever going to make in your life is investing in yourself and in your future.
Automate Your Finances
The tried and tested method is to Automate your finances. I’ve talked more about that here. Having to go and allocate money into your savings, debt repayment, and retirement takes time and discipline. An easy hack to make sure that this is done every single month without fail is to automate your finances.
For example, you could have a direct deposit from your employer to divide up your earnings and deposit them into your checking and savings account automatically. You could also set up your 401k and have your employer contribute to it automatically. Lastly, you could even set up automatic credit card payments on the day you get paid so that it’s done first.
Taking the thinking and action out of the equation simplifies your life, and by automating your finances, it makes paying yourself first that much easier
Work On Your Budget
Another way to make sure that you are paying yourself first is to work on making a budget, and sticking to it. A budget helps you understand where exactly all your money is going, and that helps you allocate your money wisely.
So many financial experts recommend that you have a budget in place, and it’s an important thing to have when working towards financial independence. I talk more about Budgeting for beginners here.
You might not always see the benefits and rewards of paying yourself first immediately, but that’s okay! Every race has a first step, and that’s what this is. At first, it might seem like a chore, or even stressful trying to change your way of thinking and budgeting, and that’s okay! Believe me, I felt the exact same way. But these are the building blocks and foundation to reaching financial freedom. So don’t hold off, start now, and build habits early on that will benefit you In the long run!
Thanks for reading,
Field Chari is a software developer, real estate investor, and avid writer. He authors in-depth guides that teach the fundamentals of personal finance, investments, and early retirement. For more captivating content, check out his blog at DigestYourFinances.com