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.

RELATED TERMS
  1. Savings Account

    A deposit account held at a bank or other financial institution ...
  2. Personal Finance

    Personal finance: all financial decisions and activities of an ...
  3. Savings Rate

    The amount of money, expressed as a percentage or ratio, that ...
  4. Retirement Planning

    Retirement planning is the process of determining retirement ...
  5. National Savings Rate

    An estimate from the U.S. Commerce Department's Bureau of Economic ...
  6. Agency Matching Contributions

    A benefit that federal government employees receive under the ...
Related Articles
  1. Retirement

    Build Your Own Retirement Plan

    A step-by-step guide to planning for your retirement. The sooner you start, the easier it will be to build a good cushion for your future.
  2. Financial Advisor

    5 Ways To Trick Yourself Into Saving Money

    America is saving 6.4 percent of its money -not bad, but we would all like to do better. Here are five simple ways to trick yourself into saving money.
  3. Managing Wealth

    7 Financial Lessons to Master by the Time You're 30

    Once you hit your 30s, it is time to get serious about your finances and money skills. Here are the top money lessons you need to master this decade.
  4. Retirement

    The 5 Top Rules of Thumb for Retirement Savings

    Follow these 5 strategies and set yourself up for a sane and comfortable retirement. Starting early is best, but it's never too late to help your future.
  5. Investing

    4 Behaviors That Sabotage Your Investment Goals

    If you can't figure out why you're not achieving the returns you want, these behaviors might explain why.
  6. Retirement

    Retirement Savings Tips for 35-to-44-Year-Olds

    Learn how the "sandwich generation" can save for retirement while taking care of their kids and parents.
  7. Retirement

    Retirement: What Percentage of Salary to Save?

    Researchers have looked at the percentage of salary you should save to ensure you end up with enough for a comfortable retirement. See how you measure up.
  8. Personal Finance

    The 5 Best Ways to Start Building Wealth

    There is a big difference between earning money and being wealthy. Here are some ideas to get you on track to grow your wealth.
RELATED FAQS
  1. Why should I pay myself first?

    The concept of "paying yourself first" is one of the pillars of personal finance and considered the golden rule by many financial ... Read Answer >>
Hot Definitions
  1. Asset Allocation

    An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's ...
  2. IRR Rule

    A measure for evaluating whether to proceed with a project or investment. The IRR rule states that if the internal rate of ...
  3. Short Covering

    Short covering is buying back borrowed securities in order to close an open short position.
  4. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  5. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  6. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
Trading Center