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. What are the best ways to plan for retirement?

    Learn the basic steps to creating a solid retirement plan that can support you and your family, and find out how to manage ... Read Answer >>
  2. How do I retire?

    When considering how to plan for retirement, firstly think about the age at which you want to retire and the lifestyle you ... Read Answer >>
  3. How much money should I have in a savings account?

    Read a brief outline of the purpose of savings accounts, emergency funds and how to determine how much money to store for ... Read Answer >>
  4. Is there a minimum I have to contribute to my 401(k) plan?

    Deciding how much to put into a 401(k) account can be tricky. There are guidelines to ensure you are investing what you need ... Read Answer >>
  5. What is the most effective way to write a successful budget?

    Learn the best way to create a successful budget. Learn how to cut unneeded expenses without impacting what you need for ... Read Answer >>
  6. Should I put money into a retirement account even if it isn't tax deductible?

    One of the biggest and most often-touted advantages of putting money into a retirement account is the tax savings that come ... Read Answer >>
Related Articles
  1. Retirement

    How To Start Saving For Retirement

    If you establish these money-saving habits and patiently allow your wealth to build, you will be taking some huge steps forward in making your financial future more secure.
  2. Savings

    Start Saving Now! Here's Why

    When money is tight early in your career, saving may seem a waste of time – but even a small amount can pay big dividends, including in peace of mind.
  3. Budgeting

    Protect Your Savings From Their Greatest Threat - You

    Watch your savings magically grow as you make withdrawals a headache and deposits a breeze.
  4. Investing

    10 Ways to Effectively Save for the Future

    Savings is as crucial as ever, as we deal with life changes and our needs for the future. Here are some essential steps to get started, now.
  5. Budgeting

    Budgeting Basics - Budgeting Tips

    By Amy FontinelleWhen you're getting used to budgeting for the first time, it's helpful to know how to manage and stay within your budget. First and most importantly, allow yourself to be ...
  6. Taxes

    Retirement Planning For 30-Somethings: Reducing Savings

    If you have accumulated savings, but find yourself highly in debt, it is possible that you are saving too much. Having a large nest egg can be attractive, but the associated benefits can be eroded ...
  7. Budgeting

    For Young Investors, Too Many Choices, Too Few Dollars

    Your retirement may be decades away, but this is no time to procrastinate.
  8. Taxes

    5 Smart Ways To Use Your Tax Return

    This year, find out how to stretch your tax refund further to strengthen your future.
  9. Budgeting

    Laid Off? You Can Still Retire

    Joblessness is temporary, but neglecting your retirement savings has permanent consequences.
  10. Retirement

    The 5 Top Rules Of Thumb For Retirement Savings

    Follow these 5 strategies and set yourself up for a sane and comfortable retirement. Starting early is best, but it's never too late to help your future.
RELATED TERMS
  1. Pay Yourself First

    A phrase commonly used in personal finance and retirement planning ...
  2. Automatic Savings Plan

    A type of personal savings system in which the plan contributor ...
  3. National Savings Rate

    An estimate from the U.S. Commerce Department's Bureau of Economic ...
  4. Financial Health

    A term used to describe the state of one's personal financial ...
  5. Minimum Payment

    The smallest amount of a credit card bill that a credit card ...
  6. Savings Rate

    The amount of money, expressed as a percentage or ratio, that ...

You May Also Like

Trading Center