What is Pay Yourself First
"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, you are 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 the "pay yourself first" plan as a very effective way to ensure that 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.
Where Does "Pay Yourself First" Money Go?
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 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 as of 2017, an estimated 39 percent of Americans have no savings at all, and 57 percent have less than $1,000 in an emergency fund.
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.