Pay Yourself First: A Smart Saving Strategy (2024)

FAQs

Pay Yourself First: A Smart Saving Strategy? ›

By paying yourself before others, you are building the habits and discipline it takes to gain peace of mind with an emergency fund, save for large purchases and trips, and invest for long-term wealth building.

If you make a habit of depositing or moving money into your savings account every time you are paid, you may be less likely to spend it on your everyday expenses. This practice can help you foster a habit of saving that will add up over time and help you be prepared for large or unexpected expenses.

It means putting 20% of your income toward savings and 80% toward everything else. Paying yourself first can be effective because it ensures you save something every pay period, and it reduces the chance that you'll spend money you intended to save.

Pay Yourself First in Action

Here is how it works: Set up automatic transfers from your checking account to your savings account every month, ideally just a day or two after you normally get your paycheck. This is the paying yourself step. Pay your rent, credit cards, and any other bills for the month.

Cons. Potential downsides to paying yourself first include: Transferring too much to savings: Not keeping enough money in your checking account can be harmful for your finances. Always keep a cushion in your checking account to avoid paying overdraft fees and possibly monthly service fees.

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.

Put 60% of your income towards your needs (including debts), 20% towards your wants, and 20% towards your savings. Once you've been able to pay down your debt, consider revising your budget to put that extra 10% towards savings.

"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.

Setting aside 5% to 10% of your paycheck is a good goal, but if money is tight, start small. It's important to be consistent and develop a habit. Consider using the 50-30-20 rule: 50% of your income goes toward necessities, 30% to discretionary spending and 20% to savings or paying down debt.

The concept of paying yourself first means that you set aside money in your budget for savings and financial goals before budgeting for anything else.

What strategy is most effective for saving money? ›

The rule is that a third of your take-home income should be used towards your home, a third for living expenses, and the last third should be for savings and investments.

This simply means setting aside money for saving before you pay the bills and buy things for yourself. This encourages you to build good financial habits and to be in a position to take advantage of opportunities that may arise.

Paying yourself first encourages sound fiscal habits. By automatically deducting a portion of your income, you can set the money aside before you can find ways to spend it. Still, it's important to be practical. It's no good saving money regularly when you have credit card debt that's weighing you down.

The simplest explanation is that paying yourself first means depositing a portion of each paycheck directly into your savings. The remainder is then spent on your expenses. The budget's simplicity is an important reason why it can work well.

Prioritizing debt repayment before saving is a prudent financial strategy that can lay the groundwork for long-term financial stability. This approach acknowledges the urgency of addressing existing debts, particularly high-interest ones, as they can be a substantial drain on your financial resources.