Why should I pay myself first?

By Aaron Levitt AAA
A:

The concept of "paying yourself first" is one of the pillars of personal finance and considered the golden rule by many financial planners. The basic idea is simple to understand. As soon as you get paid, put money into your savings account first. Before you pay your bills or buy groceries, set aside a portion of your income to save. Thinking of personal savings as the first bill you must pay each month can really help you build tremendous wealth over time. By starting with a small amount like $100 each payday and using automatic payroll deductions, after a few months, you probably won't even notice the withdrawal. You might even find you can increase the amount.
There are plenty of benefits from choosing to "pay yourself first" and prioritizing savings. First, there's the obvious one about building a huge savings balance. Regular steady contributions are an excellent way to build a large nest egg. That's money you can use in case of emergencies, to purchase a home or save for retirement via a 401(K). Paying yourself first is also an excellent way to pay for planned larger purchases. Do you need new tires for your car in six months? By paying yourself first, you're almost guaranteed to make sure that money is there when you need it. There's no scrambling at the last minute.

Then there is the psychological aspect. Building savings is a powerful motivator and there are plenty of mental benefits to seeing your savings balance grow and grow. When you prioritize savings, you're telling yourself that your future is the most important thing to you, not the cable company. While money may not buy happiness, it can provide piece of mind. People with fat emergency funds tend to have fewer emergencies than those with lower or zero balances.

Finally, paying yourself first encourages sound fiscal habits. By moving savings to the front of the line ahead of spending, you have a better grasp on the role of opportunity costs and how they affect your choices. By automatically deducting a portion of your income, you're able to set the money aside before you rationalize ways to spend it.

The bottom line is "paying yourself first" truly is the golden rule of personal finance. By using the technique, you can truly benefit over the long run.

RELATED FAQS

  1. Why would you keep funds in a money market account and not a savings account?

    Read about the differences between money market accounts and savings accounts, and see why a depositor would elect a money ...
  2. What Canadian banks offer the best savings accounts?

    Learn about different savings accounts in Canada. Explore different interest rates and fees as well as accounts that are ...
  3. What US banks offer the best savings accounts?

    Explore the best savings accounts offered by national banks comparing annual yield and other factors. Learn why the highest-yield ...
  4. What US banks offer free checking accounts?

    Quit wasting money on monthly fees associated with your checking account and get a free checking account from reputable national ...
RELATED TERMS
  1. Debit Card

    An electronic card issued by a bank which allows bank clients ...
  2. Account Minimum

    The minimum balance required to be maintained in an investment ...
  3. Average Revenue Per User (ARPU)

    A measure of how much income a business generates, given the ...
  4. Money Market Account

    An interest-bearing account that typically pays a higher interest ...
  5. Compound Interest

    Interest calculated on the initial principal and also on the ...
  6. Straight Credit

    A type of letter of credit. A straight credit can only be paid ...

You May Also Like

Related Articles
  1. Savings

    U.S. Travelers: Book That Trip Abroad ...

  2. Savings

    How Foreign Transaction Fees Work

  3. Savings

    Where To Get A Mortgage If You Have ...

  4. Credit & Loans

    5 Ways To Get The Best Mortgage Rates

  5. Savings

    Picking A Lender: Quicken Loans Or A ...

Trading Center