Do You Have a "Pay Yourself First" Mentality?
Prioritizing your paycheck once it’s deposited into your checking account is a very useful and insightful exercise, called budgeting. But, even before that happens there’s this powerful realm of savings that (if set-up correctly) can help you save more than you might have ever imagined.
This realm of savings is often referred to as “pay yourself first.”
What Does Pay Yourself First Mean?
Paying yourself first means prioritizing a portion of your paycheck toward savings goals. Those might include: retirement savings, major purchase savings, or emergency fund savings. But, it inherently suggests that you take care of your savings before you do anything else.
The phrase pay yourself first is selfish in nature because it has to be. We are selfish humans and our spending personalities are often stronger than our saving personalities, which is why you get that nagging feeling in your gut as you read this. You already know it’s going to be painful to do, require sacrifice, and don’t believe you’ll be able to do it.
In order to pay yourself first, you must rob your "spending self" of the ability to think saved dollars are available to spend. It’s mind-trickery!
The good news is that if you work for an employer who offers a retirement plan, and you contribute to it, you are already paying yourself first. You set up your contribution amount with your HR department once upon a time and every time you get paid, a portion of your paycheck goes into a retirement account.
The government helps us make these decisions as well with a form W-4. You fill this out when you start your job, it’s a worksheet that helps you set up how much to send the government in taxes throughout the year. The alternative is that you get to tax time and owe a big lump sum. The government knows that it’s easier to collect a little bit from your paycheck before it’s deposited into your checking account. The government wants to be paid first too.
Paying yourself first is setting money aside for important things before you start budgeting your dollars toward bills or lifestyle. How you pay yourself first is likely personal to how well you know yourself.
Saving at the beginning of your cash flow cycle helps bring peace of mind knowing that you are saving for future items now. The friction comes when there isn’t enough money to do all the things you wanted to do in the current month, or when something seemingly urgent comes along and the rest of the money is already spent for that month.
Be as Mindless About Saving as You are About Spending
If you have all intentions of saving money and promise yourself you will do it at the end of the month, but then get to the end of the month and end up with no savings, then the intention didn’t really help you, am I right?
Some of the very best strategies for paying yourself first are those that are automatic and the ones you forget exist. A few ways of doing this:
- Automate: set up automatic transfers from your checking to your savings account on the days that your paycheck is deposited.
- Make it difficult: Open a new savings account at another bank and don’t set up online banking. Make it tough to move money without physically going to the bank.
- Start small: most people don’t think they have any money that can be saved, or once it’s saved, they transfer it back to cover an unexpected expense. But, could you save just 1% of your paycheck? Can you try that for three months and see what happens? Increase this by 1% over time.
- Be creative: when something comes up during the month (after you’ve paid yourself first) and you’re tempted to use those savings dollars, can you get creative to solve your problem and avoid touching the savings all together? I realize this is not always possible, especially if it’s a large unexpected expense, but the exercise will help build character. Once you overcome these things once, it’s easier to do in the future.
- Save the raise: Next time you get a raise, don’t count on it as being part of your monthly expenditures, but rather plan to automatically save the difference between your old paycheck and your new one. Use the first bullet to make this happen.
What other ways do you “pay yourself first”? Leave a comment.