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Pay Yourself First


This article is the fourth of a fourteen-part series that explores the core tenets of Get Rich Slowly. It’s also a part of National Save for Retirement Week.

One of the oldest rules of personal finance is the simple admonition to pay your self first. All the money books tell you to do it. All the personal finance blogs say it, too. Even your parents have given you the same advice.

I know from personal experience it’s hard. That money could be used someplace else. You could pay the phone bill, you could pay down debt, or you could buy a new DVD player. You’ve even tried once or twice in the past, but it’s so easy to forget. You don’t keep a budget, so when payday rolls around, the money just finds its way elsewhere.

And besides: What does “pay yourself first” even mean?

To pay yourself first means simply this: Before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.

The first bill you pay each month should be to yourself. This habit, developed early, will help you build tremendous wealth.

Why pay yourself first?

If you’re just getting started in the Real World, saving may seem impossible. You have rent, a car payment, groceries, and maybe even student loans. Sure, you’d like to save money, except there’s just no money left at the end of the month and that’s the problem: Most people save what’s left over, meaning, left over after bills and after discretionary spending.

If you don’t develop the saving habit now, there are always going to be excuses disguised as reasons to delay: you need dental work, you want to go to Mexico with your friends, or you just aren’t making enough to pay your bills.

Here are three reasons to start saving now instead of waiting until next year (or the year after or even the year after that):

When you pay yourself first, you’re mentally establishing saving as a priority, this means YOU are a priority and until you see yourself as a priority no one else will. You’re telling yourself that you are more important than the electric company or the landlord. Building savings is a powerful motivator and it’s empowering.

Paying yourself first encourages sound financial habits. Most people spend their money in the following order: bills, fun, saving. Unsurprisingly, there’s usually little to none left over to put in the bank. But if you bump saving to the front i.e. saving, bills, fun then you’re able to set the money aside before you rationalize reasons to spend it.

By paying yourself first, you’re building a cash buffer with real-world applications. Regular steady contributions are an excellent way to build a nest egg. You can use the money to deal with emergencies. You can use it to purchase a house. You can use it to save for retirement. Paying yourself first gives you freedom because it opens a world of opportunity.

I’ve never met anyone who does not wish they had started saving earlier. Nobody tells himself or herself, “Saving was a mistake.” No matter what your age, begin saving now. And if you already save, consider boosting how much you set aside each month.

How to pay yourself first

The best way to develop a saving a habit is to make the process as painless as possible. Make it automatic. Make it invisible. If you arrange to have the money taken from your paycheck before you receive it, you’ll never know it’s missing.

Part of your savings plan will probably include retirement, but you should also save for intermediate goals too, such as buying a house, paying for a honeymoon, or purchasing a new car. Here are three easy ways to begin doing this yourself:

If your employer offers a retirement plan, such as a 401(k) you must enroll as soon as possible, especially if the company matches your contributions. Matched contributions are like free money.

Starting a Roth IRA is one of the smartest moves a young adult can make. These accounts allow your investments to grow tax-free. Because of the extraordinary power of compound interest (and compound returns), regular investments in a Roth IRA from an early age can lead to enormous future wealth.

Open a high interest savings account at a bank like ING Direct or FNBO Direct. Set up automatic transfers into this account, either directly from your paycheck or from your regular bank account.

Treat these transfers like you’d treat any other financial obligation. This should be your first and most important bill every month.

The real barrier to developing this habit is finding the money to save. Many people believe it’s impossible. But almost everyone can save at least 1% of his or her income. That’s only one penny out of every dollar.

Some will argue that saving this little is meaningless. But if a skeptic will try to save just 1% of his income, he’ll usually discover the process is painless. Maybe next he’ll try to save 3% or 5% as his saving rate increases, so his nest egg will grow.

If you’re struggling to find money to save, consider setting aside your next raise for the future. As your income increases, set your gains aside for retirement and savings. Once you’re contributing the maximums to your retirement (and you’ve built emergency savings), you can begin to use your raises for yourself again.

Sure, this means your effective salary will stagnate for a year or three or five. But it also means you’ll force yourself to develop the saving habit.

Example: My former husband and best friend Chris is a perfect case study. He started by having 8% of his pre-tax income set aside in his employer’s retirement plan. As Chris’ salary increased, he increased the amount he saved, routing it to various retirement accounts.

Because he never saw the money in his paycheck, he never missed it. Now he saves 30% of his income, and he even receives a 6% employer match! How did he do this? By paying himself first. (I should note that Chis just came to me the other night for advice on how to save even more. Chris is awesome.)

No matter what your age, you should make it a priority to develop a regular saving plan. Establishing this habit early can lead to increased financial security later in life. But even those of us who got a late start should do our best to pay ourselves first. I didn’t begin doing this until just a few years ago. Better late than never.

Though many personal finance books briefly explore the idea of paying yourself first, David Bach’s 2003 bestseller, The Automatic Millionaire is devoted exclusively to the subject.


The entire book is a step-by-step guide to developing the saving habit and making it automatic. If you’d like more ideas about how to make this work in your life, this is the place to look. Any good public library will have a copy.

There are some great guidelines in this book about how much you should save for retirement.

Pay yourself first, my friends. It’s a habit that you will never regret.

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