pay yourself first
Beginner Investing | Budgeting

Pay Yourself First: Treating Yourself as an Expense

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Have you ever felt like your finances are out of control? There’s money coming in, but it never seems to be enough to cover all the bills and enjoy life, let alone enough to start saving.

Have you tried to pay yourself first?

You may find yourself questioning a pay yourself first mentality because you have debt, and you’re lost when it comes to paying it off while investing. Or perhaps, you have big money goals without a clear path to reaching them. 

I get it; these cycles can be hard to break. But there’s hope!

I just finished reading the Automatic Millionaire. This book is a must-read if you haven’t read it before. Many of its principles still live with me to this day. Like, I don’t buy soft drinks when I eat out (i.e., my version of the latte factor). 

I originally read the book in 2003 when it was first published. It was one of the main reasons I started auto-investing. In the book, Bach shares a story about Jim and Sue, who were taught to “put aside a few dollars for yourself, THEN pay all your other bills.”

It’s time for you to pay yourself first. Start managing your finances, so they don’t consume your life. In this blog post, we’re going to talk about how a “pay yourself first” mentality can help you reach your money goals

What does “pay yourself first” mean

Usually, when money comes in, you pay your bills first, and then whatever is left, you spend on yourself or save. But this way of thinking keeps most people with very little money left for saving or investing.

The Simple Dollar says, “If you don’t tell your money where to go, it will find a place to be spent.”

“Pay yourself first” is a popular phrase used in personal finance and retirement planning. It means treating yourself as an expense (i.e., a bill) that takes priority over other bills.

Why should you “pay yourself first”

Be honest with yourself: How many times have you told yourself I’ll start saving next month. Or perhaps, I will start investing when I get my next raise.

One of the biggest financial mistakes you can make is thinking that once your paycheck comes in, you’re somehow going to have more money this paycheck to magically start investing and saving compared to last month.

But that isn’t how it works! Most of the time, the bills come out before deposits are made. And if there is nothing left over after expenses are paid, and you have a little fun. So, what’s left for savings? Generally, it’s nothing.

With a “pay yourself first” mentality, you know that you can’t spend what you don’t have, so you pay yourself first, and whatever is left is put towards your expenses. This gives every dollar a job ( to be saved or paid) which makes sure your money gets used the way you want. In addition, it ensures that you always set aside money for your financial goals. I mean really, who doesn’t want to coast into retirement.

How to pay yourself first

First, you need to automate your finances so that money is transferred from your paycheck or checking account into a savings or investment account before you have the chance to spend it.

Make a budget and pay yourself like any other bill.

Create a budget where the first expense you subtract from your income is to YOU. Then you pay your other bills, and whatever is leftover goes to fun things like shopping and extra purchases. 

This ensures that you are always prioritizing yourself as a necessity before anything else.

How to automate payments

Automatic payments are perhaps the best way to ensure that you always pay yourself first. Set up an automatic transfer on payday, so there is no need for any decision-making. It’s automatic. You have a few options:

  • Employer direct deposits
  • Automatic bank to bank transfers
  • Manual bank to bank transfers 

The only thing you have to remember is to use the money for its intended purpose and let it grow over time.

I recommend creating multiple accounts based on your financial goals. You’ll need a checking account, at least one high yield savings account to set up sinking funds, and at least one retirement account (preferably a Roth IRA) outside of your employer-sponsored retirement plan.

These accounts will ensure that you’re saving and investing for both your short and long-term money goals.

What if you don’t have enough money

Some of you may be thinking, what if I don’t make very much money. Don’t worry. Everyone has to start somewhere.

If you find that you don’t have enough left for your must-have expenses like food, water, and shelter, you have three choices:

  1. Cut spending
  2. Start monthly money challenges to limit spending and increase saving
  3. Increase your income through a side hustle or another job
  4. Start small and be reasonable

Although it may not be fun and easy for everyone, creating a budget may help to identify areas to cut spending that you hadn’t thought about in the past.

Budgeting doesn’t have to be difficult, and it doesn’t have to be overly strict. I present three strategies for budgeting based on your personality and needs here. There’s the anti-budget (for the person who doesn’t like budgeting), the 50-30-20 budget (for those who like goals), and the Zero-based budget (for the detail-oriented budgeter).

Try a no-spending challenge or a saving challenge. For example, an article from A Dime Saved highlights ten clever ways to save ten dimes ($10). Repeat ten times this year, and you have yourself $1,000.

Some investors are starting with just their monthly change. Figure out how much this would be for you and set it aside every month to ensure that you always have the spare change to pay yourself first.

Whatever you decide to do to be able to pay yourself first, be sure to follow through. This is the most straightforward path to building generational wealth and financial independence. So, make it happen.

Final thoughts

The key to building generational wealth is paying yourself first. Now is the time to normalize paying ourselves first. Be intentional with your money and where it goes. Develop a mindset that ensures that YOU are important and a priority.

Be sure to automate payments when possible, so there is no effort on your part. Plus, you’ll never forget to make that deposit for yourself.

Are you paying yourself first? Is this a new concept to you? Share your thoughts below.

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