What Is Pay Yourself First?

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

Key Takeaways

  • Pay Yourself First is a personal finance strategy of increased and consistent savings and investment while also promoting frugality.
  • The goal is to make sure that enough income is first saved or invested before monthly expenses or discretionary purchases are made.
  • The data show that most Americans do not have enough money saved, either for retirement or for near-term emergencies.

The Basics of Pay Yourself First

Many personal finance professionals and retirement planners tout the "pay yourself first" plan as a very effective way to ensure you continue making 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.

If you are using the "pay yourself first" 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 follow the "pay yourself first" adage. As of 2016, fewer than a quarter of Americans had enough savings to cover six months' worth of expenses, and as of 2017, an estimated 39% of Americans had no savings at all, and 57% had less than $1,000 in an emergency fund. In 2018, 23% of Americans had nothing saved for an emergency.

Advantages of "Paying Yourself First"

The advantage of "paying yourself first" out of your paycheck is that you build up a nest egg to secure your future and 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 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. It's also important to know that money set aside for retirement, especially in a Roth IRA, is accessible if needed. Fear of having no money in emergencies is no reason to refuse to benefit from tax-advantaged retirement savings plans.