Pay Yourself First: A Personal Finance Golden Rule

Pay yourself first. I’m sure you’ve heard and read this many times before. And it’s often repeated because most people don’t pay themselves first.

This common personal finance advice is repeated often because of its importance in helping you live financially well.

It’s important that you become proactive in saving money today regardless of how much you’re making. Saving $5 right now can change the trajectory of your financial life, especially, if you’ve never saved a day in your life. Saving money is a big part of your financial wellness journey.

As much as spending is a habit and something we may often do unconsciously, saving is a habit too that must be formed and nurtured. Paying yourself first is a way to create healthy savings habits.

Why are you not saving money right now?

Many people will say they don’t have money to save and will start saving once they get a higher paying job, or get the pay raise, or once the bonus arrives. Well, hate to point the obvious, but when these financial moments arrive, chances are you’ll have another reason for not saving.

This doesn’t make you a bad person. Not saving money just highlights an issue we have in our society that pushes consumerism and instant spending gratification over long-term savings satisfaction.

Personal finance’s golden rule is to pay yourself first

The concept seems simple enough but in practice, many people fail at it. I’ve certainly failed at paying myself first until I saw the advantages of doing so.

Why do we fail at saving money? It’s because we’re living well beyond our means and no matter how much our income grows we’re susceptible to lifestyle inflation.

Living beyond your means is simply spending more than you make. If your income after taxes is $2000 per month and you’re spending $2500 per month on rent, utilities, car payments, and student loans, then you’re living way beyond your means. You have a $500 deficit. And you’re probably relying on credit to cover the difference. Learn how to calculate your cash flow.

Sometimes lifestyle inflation just happens

When I say “just happens” it means you’re unaware of your increasing spending habits as your income grows too. This is detrimental to your financial wellbeing. If you’re spending at the same pace as your income, then you’ll never find the extra dollars to save or invest. Learn how to spend mindfully to create the life of your dreams, not spend for distraction.

I remember the time I was making $35,000 a year and told myself if I made $50,000 a year, then I’d be able to save. Well, guess what happened when I got the $50,000 salary? I spent more on getting a larger apartment, a new car and ate at restaurants more.

There’s nothing wrong with spending your money. You work hard to earn money to spend it, not store it indefinitely. However, mindlessly spending and saving without purpose can impact your ability to achieve financial goals.

Think of yourself as a bill that must be paid each month

It’s a Jedi-mind trick to get you into saving money.

You already know how important it is to pay your bills on time, so you don’t get the electricity cut or get hit with late payment fees. Paying yourself first is setting aside money towards your financial goals. These goals can be for an emergency fund, rainy day fund, or for a future purchase.

Starting small and staying consistent leads to better savings habits.

Don’t let the “experts” tell you saving $1 isn’t enough. It’s a big step for someone who hasn’t saved a day in their life.

A few years ago, I was doing an event in North Carolina about saving money. An attendee approached me afterward and stated she had never saved money in her life. She wanted to save but didn’t know how much she could afford to save. I suggested saving $5 per paycheck.

Months later, she emailed happily stating how she saved over $1,000.

Today, she has over $3,000 saved in a mix of savings accounts, certificates, and a money market with her credit union. She has also started a car fund to purchase a used card in 3 years.

Paying yourself first satisfies an emotional need

When you realize you have nothing left in your checking account after paying your bills, you’re stressed and feel helpless and hopeless. Saving money for future needs and wants can give you a sense of comfort and security. Basically, you have (some) money and that’s a good feeling to have.

The more you save you’ll realize the more you want to save.

Instead of feeling good after spending money, you’ll feel great seeing your savings accounts grow. Now, the truth is you earn money to spend it, and saving money is just another way of spending, but later in time.

I save for emergencies, vacations, and various “wants.” In my mind, I’m making these purchases and the savings accounts show my progress in achieving these goals.

It’s kept me motivated.

I’ve used apps and automated savings services to help me. These apps helped me visualize my goals and transfer money based on rules or algorithms. When triggered the automation transfers money from my checking account into my savings goals or rounds up my purchases. I use a number of these apps to help me save purposefully without having to manually do the work. Check out the financial marketplace for these apps to find the right one for you.

How to pay yourself first

1. Direct deposit your paycheck and have automatic transfers into savings accounts. You can open separate savings accounts and auto-transfer money each pay period into these accounts. Make sure you label the savings accounts for their intended purpose (e.g. emergency, car, travel, etc).
2. Enroll in your employer’s 401k. Start with the max percentage your employer matches. If you’re not taking advantage of your employer’s 401(k) plan, then you’re leaving money on the table.
3. Open a savings account with another financial institution. You can have a savings account with your primary bank, but you can also consider having separate savings account elsewhere. Sometimes having the savings elsewhere removes the temptation.

How to find extra money when you’re living paycheck-to-paycheck

1. Reduce your monthly debt payments. Reach out to your creditors for repayment plans and options to reduce your monthly bill. Consider a debt consolidation loan for your credit card debt to free extra cash that can be used to pay yourself first.
2. Eliminate and reduce subscription service costs. This may mean getting rid of Netflix or lowering your cellphone bill. Speak to your utility companies and service providers about ways to reduce your monthly bill. There are services that help you lower your bills by automatically canceling subscriptions.
3. Make extra cash. There are many ways to earn extra money by selling your used stuff or offering your skills to others. I live listed over three dozen ways to earn money in my latest article.

Now, it’s time for you to pay yourself first, so you can freely spend on the things you want and need in the future.