Why Should I Pay Myself First?

It’s a good way to save for the future

How much do you have in savings? Do you at least have an emergency fund that will cover the cost of a crisis if one arises? If you don’t, you’re not alone. According to a 2021 survey conducted by Investopedia’s sister publication The Balance, the majority of Americans don’t have $250 to spare. That also means they don’t have enough for future expenses or luxuries. It doesn’t have to be that way, though, especially if you follow this simple strategy: Pay yourself first.

This golden rule is what can set you apart from people who have to scrape by every month. However, it requires dedication and discipline; you’ll have to check your need for instant gratification at the door.

Key Takeaways

  • Paying yourself first is considered the golden rule by financial planners.
  • You can accomplish it by taking as little as $50 to $100 each payday and putting it into an investment vehicle, such as a savings or retirement account.
  • Set aside the amount you’ve committed to saving before doing anything with the rest of your money, including buying groceries.
  • If you are carrying debt, however, weigh the financial implications of putting more money toward your savings than your debt. You could end up paying more in interest than you save.

What Does It Mean to Pay Yourself First?

Paying yourself first is a pillar of personal finance. Not only do financial planners suggest it, but there are also plenty of books that prescribe it. It’s even likely that your parents have given you this advice.

The concept is simple. By paying yourself first, you’re socking away some cash just for you, whether in a savings or retirement account. Do this before you do anything else, whether it's paying bills, buying groceries, giving your kids their allowance, or purchasing that brand-new TV.

Thinking of personal savings as the first bill you must pay each month can help you build significant wealth over time. By starting with a small amount, say $100 each payday, and using automatic payroll deductions, you probably won’t even notice the withdrawal after a few months. Even if you start out with $25 or $50 a month, you’re one step ahead of the game. Eventually, as your salary rises or you tighten your monetary belt, you can increase the amount you set aside.

This strategy is also a good way to pay for planned larger purchases. Do you need new tires for your car in six months? Are you hoping to go on a really nice vacation? Do you want to save up for your child’s education? By paying yourself first, you’re more likely to have the money for these things when you need it. You won’t have to scramble at the last minute.

"Pay yourself first" can also be a strategy for making large planned purchases, such as a car, vacation, or wedding. It can prevent you from going into debt to accomplish these goals.

How to Pay Yourself First

The easiest thing to do is to open a savings account, if you don’t already have one, at the bank where you maintain a checking account. This gives you a convenient way to make transfers or deposits as soon as you get paid. Be sure to make it an automatic transfer, either for each payday or once a month, whichever works for you. The other option is to open an account at an online-only bank. These generally offer higher interest rates than brick-and-mortar banks, and because you can’t do your banking in person, you won’t be tempted to use the money instead of depositing it.

If you have access to an employer-sponsored retirement plan, such as a 401(k), contribute to that instead of a savings account. Your money will accumulate tax-free, and many employers will match your contribution, so you’ll get a little extra. If you don't have this option, set up your own individual retirement account (IRA). If you’re self-employed, consider a SEP IRA, SIMPLE IRA, Keogh plan, or a one-participant 401(k).

You can also check out certificates of deposit (CDs), which allow you to put your money aside at a set interest rate for a specific period of time—anywhere from a few months to a few years. However, because CDs usually require a minimum deposit, you may need a larger amount than you would for a savings or retirement account. Also, if you take your money out before maturity, you may not be allowed to keep the interest it earned while deposited.

It’s All About Psychology

Building savings is a powerful motivator, and there are mental benefits to seeing your balance grow and grow. When you prioritize savings, you’re telling yourself that your future is the most important thing to you. Also, though money may not buy happiness, it can provide peace of mind because it gives you a greater ability to cope with adversity.

Fortunately, when you develop a routine, you’re likely to stick with it. The human mind craves structure and a sense of discipline, even if you live on the wild side once in a while. When you start saving every payday and adhere to that routine, there’s less chance that you’ll stray.

Deal With Your Liabilities

Remember not to neglect your liabilities. If you’re swimming in credit card and personal loan debt, be practical and get that under control—or even pay it off completely—before you commit to saving every month. Compare the amount of monthly interest you’ll be earning on your savings accounts with how much you’ll be paying in interest monthly on your debt. If the latter exceeds the former, you should pay off the debt first. You don’t want your debt to cost you more money than you save.

What Does Pay Yourself First Mean?

Pay yourself first is a strategy for maximizing savings over time by setting aside a portion of your monthly income in savings before you do anything else with the money, whether it's paying your mortgage or rent, buying groceries, or acquiring that rare book you always wanted for your library.

How Do You Pay Yourself First?

You need an account in which to put your savings, and you should automate the process so you aren’t tempted to spend the money instead. It can be anything from a simple savings account to an employer-sponsored retirement plan. Obviously, the kind of account you choose will determine the growth potential of the money you put into it.

Are There Circumstances in Which Paying Yourself First Is a Bad Idea?

If you are carrying a lot of high-interest debt on credit cards and/or loans, you should pay those off, or at least pay them down significantly before you embark on a pay-yourself-first plan. Otherwise, you could end up paying more in interest on your debt than you earn from your savings, potentially putting you further behind.

The Bottom Line

Paying yourself first encourages sound fiscal habits. By automatically deducting a portion of your income, you can set the money aside before you rationalize ways to spend it. Still, it’s important to be practical. It’s no good saving regularly when you have high-interest debt because it will only cause you to pay even more in interest over the long run. Do a financial checkup before you commit to a plan. It can save you a lot of hassle and money.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. The Balance. "Survey: Half of Americans Don't Have $250 to Spare."

  2. Internal Revenue Service. "401(k) Plan Overview."

Open a New Bank Account
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Open a New Bank Account
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.