Learning to Pay Yourself First
Exactly what does it mean to pay yourself first? Essentially, it means that your top priority should be to put a certain amount of money into your savings or investment accounts (or both if you can afford it) before you pay your monthly expenses, such as your rent or mortgage payment, car payment, and student loan payment.
Doing this can help you prioritize your financial well-being and may ensure that you don’t splurge on unnecessary items rather than saving for your future.
Another financially savvy idea is to contrast this strategy with one where you take care of monthly bills first then decide if you have enough money left over to put into your savings. If so, how much? For some people, the amount saved or invested using this strategy may end up being little to none.
If the “pay yourself first” strategy appeals to you, it can be a great place to start. One way to get the ball rolling is to take a look at your budget, determine how much you can put away, and set up automatic transfers. Next, you might want to review your budget periodically to see if you can increase the amount you’re paying yourself. If the strategy appeals to you but you’d like more guidance about how paying yourself first works, read on!
Why Would You Pay Yourself First?
It may help to know that plenty of financial planners believe in this approach, as it can help you build a nice nest egg. Here’s a few ways paying yourself first can help you financially.
To Save Consistently
The beauty of this approach is that it focuses on consistent, prioritized savings and investment, along with a frugal mindset, which could give you the freedom to ultimately put your money where it matters most to you.
To Prepare for the Future
Everyone has unique savings and investment goals, and it’s helpful to be clear about your own — then you could use those goals as motivation to consistently pay yourself first.
To get started, it could help to brainstorm how much you’d like to save and what you would do with that money.
You might, for example, want to put a certain amount of money aside for things like a downpayment on a house or to help your children attend college. Or you may want to travel.
To Stay Motivated
Because some of the bigger savings goals may take a while to achieve, it could help to also have shorter-term goals to keep yourself motivated.
Your shorter-term goal, for example, might be to put enough away in savings to cover a month’s worth of expenses — and then three months, and then six months. Or you may want to save to buy a new car. Paying yourself first can make meeting those shorter-term goals more doable.
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A Look at Spending
If saving enough money to meet your goals seems out of reach, then it might help to take an honest look at your spending habits. Maybe you find yourself making impulse purchases when you’re feeling stressed. If so, know that you’re not alone when indulging in some retail therapy.
If you only rarely indulge in impulse shopping, and the dollar amounts are within your means, then this isn’t likely to cause significant harm. But, if this becomes a habit, crossing over into compulsive spending, then this could have a serious impact on your financial well-being.
If you believe that you’re not achieving savings goals because of overspending, then it could make sense to address that issue first. According to Experian.com , it might help to identify your emotional triggers and then avoid shopping during those times.
If you aren’t yet sure what those triggers are, track impulse purchases and reverse engineer when you’re more likely to spend too much. You may notice it happens after a long day at work or when you’re worried about something.
As another strategy, if you’re not sure whether something fits into your budget, you could wait a couple days before making a buying decision or call a friend when you’re feeling the urge to shop.
Here’s another potential challenge: FOMO spending — the fear of missing out. In 2020, Mint discovered that 25% of shoppers admitted to feeling pressured by others to spend money on purchases they didn’t need.
If that feels familiar to you, there are strategies to help conquer FOMO spending. You can brainstorm free alternatives to high-cost plans a friend might suggest. When is a local art museum, for example, offering a free community day? What movie can you get from the library and invite friends to watch with you? What about a hike in the local park system?
If you find that FOMO kicks in when you have your credit or debit card handy, you might want to only carry cash when you go out to your favorite restaurant, bar, or shop. And if ads and posts on social media cause you to want to shop, you could reduce your time on Instagram, Facebook, Twitter, and the like.
Here’s another strategy you could consider: If you’re tempted to put a discretionary purchase on your credit card, you could use SoFi’s credit card interest calculator to see how much interest you might really pay on that impulse buy. The amount might shock you and cause you to put the item down and walk away.
Before you can really know how much money you can pay yourself first, you might need to be confident in your budget. Although the word “budget” can have a negative connotation, it’s really a way to take control of your money to make sure you’re saving and spending in a way that meshes with your wants and needs, dreams, and goals.
By tracking your spending for a period of time, say 30 days (or more), you might get a sense of where your money is going. You could create a list of your monthly expenses, including your rent or mortgage payment, car payment, credit card payments, student loan payments, and more.
You might also consider listing what you pay for your utilities, cell phone, groceries, and so forth, along with discretionary purchases, in order to see a more complete picture of monthly costs.
Ideally, when you add these up, you’ll be spending less than what you earn, and you could use that information to help determine how much you can potentially deduct from your paycheck and put into savings or investment accounts.
If you discover that you’re not currently living within your means, or that you aren’t able to save as much as you’d like, then one good idea is to see where you can trim expenses. You may also consider ways to grow your income, whether that means asking for a raise or picking up a side gig.
Based on this information, you can set up a monthly budget. One budget strategy is the 50-30-20 budget. In this budget, you allocate your take home pay into three categories; needs (50% of your take-home pay), wants (30% of your take-home pay), and savings (20% of your take-home pay). Allocating your money with this budget offers flexibility so that you can save and spend on the things that are most important to you.
How to Start Paying Yourself First
Let’s look at a few steps you can take to make paying yourself first a priority.
Create an Emergency Savings Account
As a first step in paying yourself first, it may make sense to create an emergency savings account if you don’t already have one or if it needs an extra infusion of cash.
That way, if your car or HVAC system breaks down or you have unexpected medical bills, you’ll have cash to help address the situation without simply relying on high-interest credit cards or other forms of debt.
Conventional wisdom suggests an emergency account that contains three to six months’ worth of basic living expenses, put into an account that’s accessible at any time.
Then you could move on to saving for other short- and long-term goals, including but not limited to saving for retirement.
When trying to determine how much money you should pay yourself first in the beginning, one idea is to start with a small amount and then incrementally increase it until you reach your goals.
Or it might make sense to determine how much you’ll need for your goals and reverse engineer how much you’ll need to put away to reach them in a certain time frame.
Also, if you receive a bonus or inherit money, you could consider putting all of the additional money into a savings or investment account. You could do the same if you get a raise.
Eliminate Unnecessary Expenses
If you are looking to kickstart your savings and build it up fast, there are several strategies you might consider. You may choose to review your expenses and get rid of unnecessary ones.
What online subscriptions and streaming services are you paying for? Are you using them? If you review an entire month’s worth of debits from your account, how many do you see that are discretionary, ones you could live without?
Once you’ve eliminated some expenses, consider adding that combined dollar amount to the money you’re sending directly to your savings account. Even if the amounts, overall, are small, over time they can really add up.
Set Up Autopay
Sometimes, if you owe a monthly payment to a company, they’ll give you a discounted rate if you set up auto-pay and have your payment automatically deducted from your account. This could help to assure the company that the bill will be paid on the due date. Meanwhile, you could benefit from a discount and the convenience of not having to manually pay the bill each month.
This may help you avoid late fees, as well, but you might want to be cautious. If you don’t have enough money in your account on the day the bill is due to be deducted, you might be charged additional fees, such as an overdraft fee by your bank.
Automate Your Savings
Automating your savings can be just as useful as automating your bill pay. Ways to automate your savings include, setting up direct deposit, funneling a set amount to your savings each month, and taking advantage of employer programs like a 401(k) and any employer match offered to employees.
Consider a Spending Fast
What about going on a spending fast? You might, for example, pick a day or two of the week when you don’t spend any money outside of what it takes you to get to and from work.
You could also consider other cost-saving ideas like packing your lunch, skipping the stop at the coffee shop, and getting your book from the library on the way home, not from the bookstore. Besides saving you money on your “fasting” days, employing these strategies may help you to pay more attention to discretionary spending on the other days.
Review Your Bank Accounts
Also, you might want to review your bank accounts. Are you getting as much interest as you can, given that the average rate for savings accounts is considered pretty low, historically speaking? What fees does your bank charge? Have you shopped around to see if you could get a better deal?
Stick to the 30-Day Rule
Here’s another strategy you may want to consider as a tool to help with overspending: the 30-day rule. It has two parts and, combined, the rule might help you save money more quickly. In the first half, if you’re tempted to buy anything outside of what’s necessary to meet basic needs, then you write down what you want to buy, how much it costs, where you saw it, and the date.
Then, give yourself 30 days to think about whether you really want to buy this item. If, after 30 days has gone by, you still want to make that purchase, you could price shop it and then buy the item.
As an added twist, take the amount of the item and put those dollars in your savings account. Then, when 30 days have passed, decide whether you’d be happier having more money in your savings or with making this purchase.
If it’s the former, then you have more savings built up. If you still want the item, you could withdraw the money from your savings, rather than putting it on a credit card.
Paying yourself first is a great way to prioritize saving, especially if you find yourself tempted to make unnecessary purchases often. Taking some time to think about your financial goals, reevaluating your spending habits, and prioritizing your savings, can help you get to a more secure place financially.
Having the ability to track your spending and savings may be one key to help in creating an effective plan to pay yourself first. A checking and savings account with SoFi may help track your weekly spending in the app. It makes it easy to know just where you stand to help you hit your financial goals.
It can be difficult to gauge how well you’re progressing toward your goals when all of your money is in one general account. SoFi Checking and Savings offers a vaults feature where the user can create individual financial vaults within a single checking and savings account. For example, you could have one vault specifically for paying bills, or one to save up for travel.
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