It’s possible to pay yourself first with the following steps:
- Establish how much money to save—as a set dollar amount or a percentage of every paycheck—and what to save for.
- Consider setting up an automatic transfer for some of each paycheck to go directly into a savings account, retirement account, investment or other savings vehicle.
- Create a budget based on what funds will be available after paying yourself first. Monthly expenses and spending can be managed while still tucking money away.
Here are some common savings goals you might consider if you’re paying yourself first:
Retirement
While three-fourths of Americans have retirement savings, only 40% think their savings are on track, according to the Federal Reserve. Paying yourself first through a retirement account can help build that post-career income.
You might consider whether you’re eligible for work retirement plans, such as a 401(k) or a 457(b). If you’re not, a traditional IRA or a Roth IRA might be options. And those looking to retire early could consider additional ways to save.
Emergency fund
An emergency fund is meant to cover unexpected expenses like car repairs, medical bills or loss of income. The Consumer Financial Protection Bureau (CFPB) suggests keeping funds in “one of the safest places to put your money”—a bank or credit union.
An automatic transfer could help grow an emergency fund to reach a set goal. Some employers might offer a direct deposit option that can disperse paychecks into multiple accounts.
Saving for a major purchase
If there’s a vacation, a car, a mortgage, college tuition or another big purchase on the horizon, it might take time to save up for funding that purchase. The CFPB recommends setting a goal amount and then breaking it into steps—like saving $100 a month in gas by biking instead of driving or saving $50 a week by not buying takeout.
One of these steps could also be paying yourself first by putting a certain amount into a savings account every paycheck. By saving just $20 a week, that account could collect over $1,000 in a year.
FAQs
Key takeaways
What does it mean to pay yourself first your answer? ›
"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.
What is one way to pay yourself first? ›
One way to pay yourself first is to set up a split deposit, which is when a part of your paycheck goes into a savings account and the rest goes into a checking account.
What is pay yourself first a priority to make sure that? ›
Paying yourself first means saving money before using it for bills and other spending. This approach to budgeting protects against financial emergencies and provides for future opportunities. Automatic transfers from your paycheck to dedicated accounts for saving are an easy way to make paying yourself first work.
What is the power of paying yourself first? ›
By paying yourself first, you create a financial safety net that acts as a buffer against these unpredictable circ*mstances. This disciplined approach ensures that a portion of your income is consistently put away, helping you avoid the pitfalls of overspending and living paycheck to paycheck.
How should you pay yourself? ›
To pay yourself a salary, you need to set up an employment agreement with the corporation and become an employee. You'll receive regular paychecks like any other employee, and taxes will be withheld from your salary. Alternatively, you can receive dividends if the corporation generates profits.
How do I know what to pay myself? ›
To determine your salary, you need to first estimate your company's annual gross revenue and subtract all operating costs, such as rent, employees' salaries, inventory and supplies. Make sure to set aside extra to cover emergency expenses or business debt, such as payments for a small business loan.
What does Robert Kiyosaki mean by pay yourself first? ›
The goal is to pay yourself first and always to have money to invest. Once you have money for investments, you should learn about assets worth investing in so that your money grows faster than the inflation rate. As always, we suggest you conduct due diligence before investing your hard-earned money.
What is it called when you pay yourself? ›
An owner's draw refers to an owner taking funds out of the business for personal use. Many small business owners compensate themselves using a draw rather than paying themselves a salary.
What is the 50 30 20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
You can start by moving money into a savings account regularly with each paycheck.
- Ask your employer to split your direct deposit. ...
- Another savings strategy is to set up an automatic transferFootnote 2 2 for each payday, ...
- How to set up automatic transfers. ...
- Establish a dedicated savings account.
You can't spend the cash that's out of sight, the logic goes, or miss the money you never “had” in the first place. “Pay yourself first” was first coined in the 1920s by George Samuel Clason, an American entrepreneur who founded a successful publishing business in Denver, Colorado.
Why is saving and paying yourself first important? ›
The advantage of paying yourself first out of your paycheck is that you build up wealth to secure your future and create a cushion for financial emergencies, such as car break down, financial crisis, or unexpected medical expenses. Without savings, many people experience a lot of stress.
What does paid yourself mean? ›
After you have set aside your savings, you can prioritise and adjust your expenses to fit within the rest of your income. “Paying yourself” means that you prioritise your expenses such as: Your financial goals – from higher education to retirement. An emergency fund.
What does it mean to pay yourself first brainly? ›
Final answer:
To 'pay yourself first' means to prioritize saving by setting aside a portion of your income before spending any money. This habit helps achieve financial stability and long-term goals.
