Pay Yourself First
Definition
A budgeting philosophy where you automatically save and invest a set amount or percentage of income before allocating money to expenses, ensuring saving takes priority over spending.
Pay yourself first inverts the traditional budgeting approach. Instead of spending first and saving whatever's left (usually nothing), you automatically transfer savings and investments before touching your paycheck. The amount you save is determined first; spending adapts to what remains.
The practical implementation is straightforward: set up automatic transfers from your checking account to savings and investment accounts on payday. If you earn $5,000/month and want to save 20%, $1,000 automatically moves to savings/investments before you spend anything. You then live on the remaining $4,000.
This approach works because it leverages the psychological principle of adaptation. When money is automatically moved before you see it, you adapt your lifestyle to the lower available amount. Most people who try this for 2-3 months find they don't miss the automatically saved money — they unconsciously adjust spending.
The optimal "pay yourself first" percentage depends on your financial situation and goals. The minimum target for most people is 15-20% of gross income. FIRE (Financial Independence, Retire Early) enthusiasts target 50-70%. Even 5-10% is meaningful if you're starting from zero savings. The important thing is to start and increase over time.
This philosophy pairs well with automated investing. Once money is transferred to an investment account, automatic purchases of index funds ensure the money is deployed immediately. The combination of automatic saving and automatic investing creates a hands-off wealth-building system that requires willpower only at setup — not every paycheck.
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Frequently Asked Questions
How much should I pay myself first?
Target 15-20% of gross income as a starting point. If that feels impossible, start with 5% and increase by 1% each month until you reach your target. The amount matters less than the consistency and automation. Any amount saved before spending is better than trying to save what's left over.
Where should the money go?
Priority order: 1) Employer 401(k) match (free money), 2) High-interest debt payoff, 3) Emergency fund (3-6 months expenses), 4) Roth IRA or additional 401(k), 5) Taxable investment account. Set up automatic transfers for each priority in order.