What Does Paying Yourself First Mean? How It Works and Goal

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.

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.

This suggestion hinges on the fact that It removes the temptation to skip a contribution and spend the funds on expenses other than savings. Regular savings contributions can 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 accounts, such as a 401(k) or an IRA.

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. In fact, the Federal Reserve reports that in 2019 (the most recent figures available) less than 40% of Americans could not cover a $400 emergency in cash.

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.

Special Considerations

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.