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. How does a bank determine what my discretionary income is when making a loan decision?

    Learn how banks determine your discretionary income, and discover why it is important to know your discretionary income even ...
  2. Why do economists think it is important to track discretionary income?

    Learn about the importance of discretionary income to economists, particularly for economists who emphasize consumer spending ...
  3. What is the difference between disposable and discretionary income?

    See how disposable income and discretionary income are different, with an example to demonstrate why discretionary income ...
  4. What proportion of my income should I put into my demand deposit account?

    Find out how much money to keep in your liquid demand deposit accounts, such as checking or savings accounts, and discover ...
RELATED TERMS
  1. Linked Transfer Account

    Accounts held by an individual at a financial institution that ...
  2. Equitable Division

    A legal theory that guides how property acquired during the course ...
  3. Debit Card

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

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

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

    An interest-bearing account that typically pays a higher interest ...

You May Also Like

Related Articles
  1. Savings

    Millennials' Money Habits: How to Help

  2. Personal Finance

    Insurance Companies Vs. Banks: Separate ...

  3. Personal Finance

    Why Cash Could Be Your Best Bet

  4. Savings

    Checking Account Reviews: Chase Premium ...

  5. Brokers

    Can Tradier's Brokerage API Replace ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!