How to Pay Yourself First
by Katie Bruno, MIMFA
CERTIFIED FINANCIAL PLANNER™ Professional
To “Pay Yourself First” is to make yourself a priority. It means to set aside a specific amount of money from each paycheck towards a financial goal.
The traditional method of budgeting involves writing down each and every expense, and then seeing how much income you have left at the end of each month to save towards retirement, a dream vacation, or other goals on your wishlist.
However, sometimes when you get that paycheck, an unexpected expense comes in, and any extra money you had is now gone. So you plan again for the next month, but then… this paycheck to paycheck cycle seems to repeat itself.
When you pay yourself first, you set aside money that’s automatically routed from your paycheck into another account, whether that be a savings, retirement, or investment account. Essentially, you can break the cycle by paying yourself first before you pay any of your bills, monthly expenses, or use it for discretionary spending.
Sounds simple, right? This top-down budgeting strategy has been coined the “golden rule” of personal finance.
Here’s how it works:
Decide how much to pay yourself first
Some financial experts recommend saving 10% of your income, others say between 1-5%. The number is different for everyone. The best solution is to pay yourself based on the leftover amount each month. Add up your expenses and subtract them from your income. This should give you a baseline for the amount of money you have leftover. Leave a little bit of wiggle room for the unexpected expenses.
Set a savings goal
You may have a simple goal to fund an emergency savings, or maybe you are saving for a down payment on a house. Determine the amount you need in each goal and divide that by the amount you are going to set aside each month. This will tell you how long it will take to achieve each goal. If you have multiple goals, prioritize them and determine what works best for you. You may find that you want to build an emergency fund and contribute to your retirement at the same time.
Open new accounts
You should create a separate account that is used for a specific goal. If your goal is to save for retirement, you may want to open a Roth IRA or maybe you have a company 401(k). If your goal is to save for a vacation, consider opening a high-interest savings account.
The regular, consistent method of saving can really help one build up an emergency savings or a long-term retirement account. In order to pay yourself first, you will need to automate. This can be done in a few different ways.
Automatic Transfer: Most financial institutions have the ability to automatically transfer funds from one account to another. For example, if you get paid on the 1st of each month, you should set up a recurring transfer from one account to another on the same day you get paid.
Splitting Direct Deposit: If your employer offers direct deposit, have a portion of each paycheck deposited into that separate account.
If you're between the ages of 25-40, you have the advantage of time on your side.
A little financial foresight now can help you build wealth over time, and ultimately, reach your goals. If you have questions about your financial future, we are here to help you find the right answers.
- Should I pay off my student loans or other debt versus invest?
- How do I save 10% of my salary?
- How should I discuss money with my partner?
- Choosing a 529 Plan for your kids
- Maximizing an inheritance
- Participating in an employer’s retirement savings plan
Morey & Quinn Wealth Partners are more than just financial planners, we’re Life Planners.
We take you through a thorough planning process to design your unique portfolio. We take the time to learn about your life experiences, risk tolerance, and all your goals. Then, together, we’ll build your customized financial plan to set you up for success.
Morey & Quinn Wealth Partners
Raymond James® LIFE WELL PLANNED.
Toll Free: 877.541.6593
11225 Davenport St, Suite 109
Omaha, NE 68154
Any opinions are those of Katie Bruno, and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.