What does 'Pay Yourself First' mean

"Pay yourself first" is a phrase popular in personal finance and retirement planning literature that means automatically routing your specified savings contribution from each paycheck at the time it is received. Because the savings contributions are automatically routed from each paycheck to your investment account, this process is considered to be paying yourself first; in other words, paying yourself before you begin paying your monthly living expenses and making discretionary purchases.

BREAKING DOWN 'Pay Yourself First'

Many personal finance professionals and retirement planners tout this idea as a very effective way to ensure that you continue to make your chosen savings contributions month after month. It removes the temptation to skip a contribution and spend the funds on expenses other than savings. Regular, consistent savings contributions go a long way toward building a long-term nest egg, and some financial professionals even go so far as to call "pay yourself first" the golden rule of personal finance.

Where Does Pay Yourself First Money Go?

If you are using this method of personal finance, you may opt to put your money in a range of savings vehicles, depending on your financial objectives. The phrase can refer to earmarking a certain percentage of your paycheck to be contributed to your retirement account, such as a 401(k). Alternatively, you may put the funds in a cash savings account. Paying yourself first simply involves building up a retirement account, creating an emergency fund or saving for other long-term goals, such as buying a house.

Do Americans Use Pay Yourself First as a Financial Strategy?

Research on savings indicates that a relatively small percentage of Americans are following the "pay yourself first" adage. As of 2016, less than a quarter of Americans have enough savings to cover six months' worth of expenses, and 26% of Americans have no savings at all, indicating that over half of the country do not pay themselves first.

Advantages of Paying Yourself First

The advantage of paying yourself first is that you build up a nest egg to secure your future, and you create a cushion for financial emergencies, such as your car breaking down or unexpected medical expenses. Without savings, many people report experiencing a large amount of stress. However, many people claim that they simply do not earn enough money to save, and they fear that if they start saving, they may not have enough money to cover their bills. Financial advisors recommend measures such as downsizing to reduce bills to free up some money for savings.

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