How To Pay Yourself First: 5 Tips To Save Money
It’s funny how childhood memories stick with you. Our local credit union was a block from our home in a small brick building that couldn’t have been more than 1,000 square feet.
I remember walking there as a child with my mother to deposit a portion of any money that I earned into my own savings account. They always gave us suckers, so initially, that is how my Mom got us to go.
As I got older, I remember being so proud of the fact that I had my own saving account. I didn’t realize that my parents were actually teaching me the pay yourself first method of budgeting.
My Mom used to say I was paying myself – at the time, I used to wonder “what does pay yourself first mean?” Now I know that by paying myself first, I’m saving money, learning financial discipline and setting my family up for future financial success.
I really owe my parents for teaching me the most basic financial lesson. Mom and Dad – THANK YOU!
Their rule of thumb was to always pay yourself first.
They paid their tithing and then paid themselves before working their way down through the rest of the bills.
I’m not saying I was always the best saver, but it became a habit to always put at least a little bit of everything I earned into my savings account. Sometimes it was only a few dollars, but the habit remained.
When people ask me, “how much should I pay myself first”, I always say, “it isn’t so much the amount that you are saving as the habit you are making.”
When you prioritize saving a portion of your income you will always end up ahead.
My personal goal when paying myself first is to do a minimum of 10% of my take-home pay.
We all know that saving money is important, but what does pay yourself first mean?
Pay yourself first means that you are always putting yourself first in your life. I know it sounds kind of selfish, but unless you put paying yourself first, something else will always have a claim on your money.
If you want to save money, you have to make it a priority. You can’t just do it half-heartedly. You have to decide it is time to be different and make some tough decisions.
I’ve made a lot of sacrifices over the years to save money. I’ve had to turn down a lot of fun stuff and don’t always have the latest and greatest clothing, gear & technology.
However, I have a fully funded emergency fund and have paid off $293,000 worth of debt in 5 years. All of the sacrifices are worth it to be able to write those words.
Over the years, I’ve tried a variety of methods to make sure I pay myself first. Some methods have worked better than others, but hopefully one of them will work for you.
Track Your Money To Help You Pay Yourself First
I’ve found that if I track my income, then I have a much easier time always paying myself first. I was tired of haphazardly paying myself first and not always hitting my numbers.
So to hold myself accountable I created a pay yourself first worksheet. I track all of my income and then multiply that number by the percentage I’m saving that month.
I can’t believe how much better I am at paying myself first when I actually track everything and hold myself accountable.
You are welcome to use my Pay Yourself First Worksheet if you think it will help you start tracking your money.
How to always pay yourself first?
1. Use technology to save extra money
I’m a huge fan of automating the money-saving process. I love doing automatic transfers each month and also having payroll deductions sent to my savings accounts.
These are my new favorite tools. I’m currently using Digit to boost my savings. I highly recommend giving Digit a try. It is seriously the easiest way to save money. I wish I had discovered it years ago. Here is a more detailed post I wrote reviewing the product – How to automate your savings plan in 5 minutes.
2. Stash your $5 bills – or some other set amount
I started this habit while in college. Anytime I ended up with a five in my wallet I’d put it to the side to add to my savings fund. Sometimes I needed that $5, so instead, I would do $1.
When I got a bit more established and had a more sophisticated method, I decided to keep up the habit and put the money aside for my future wedding.
I didn’t want the funds to get mixed up with my regular savings, so I stashed the money in various places in my room. I had forgotten to tell Aaron and the girls about my “little stashing problem” and they came across some of my money when they were helping me move.
They had a blast trying to find my money stashes. It is probably a good thing they got into it because I might have forgotten a few of my random hiding spots.
To this day I don’t donate books unless I’ve checked to make sure I didn’t stash cash in them.
My method worked, I had almost $4,000 stashed in my bedroom, which paid for a big chunk of our wedding.
For this step, it isn’t so much the amount you are saving, but the steady consistent habit of saving you are developing. I still find myself picking out my $5 and setting them to the side.
If you want simple, setting aside cash is a great way to pay yourself first.
3. Split your direct deposit payroll.
I have a set amount from every payroll deposited into a completely separate savings account at an online bank.
I do this for two purposes.
First, if the money never hits my account I usually forgot about it and since it was never in my working account I can’t miss it. Money management is all about psychology.
Second, it takes 4-5 days to transfer funds from my online bank. This means that I can’t just transfer the money anytime some minor catastrophe happens.
This means I have to actually plan out my withdrawals from this account. It also means I only use my emergency fund for a true emergency.
If you are interested in a similar system I currently use a Capital One 360 account. Their online system is phenomenal. Their current savings rate is .75%, which is significantly better than the .03% I’m making at Chase.
On a side note – I keep another savings account attached to my regular checking account that I can easily access for emergencies. I keep one month of expenses in this account and then the remaining 5 months of my emergency fund in my Capital One account.
It started out as a way to remove temptation but has become a great way of managing my emergency fund.
4. Always include saving/paying yourself in your budget
The first item on my budget is my tithing and the second is to pay myself. My goal is to always do at least 10% of my income when paying myself.
I’ll adjust this percentage based on my financial situation. I also split my payments to myself between savings and retirement. Once my emergency fund was fully funded I began contributing a larger percentage to retirement.
Of course for this step work, you have to actually stick to your budget.
5. Set specific and measurable savings goals
I’m very motivated by goals, so having a specific purpose for my savings always helps me stay motivated. My original savings goal was to have a 6-month emergency fund set aside.
Now that our emergency fund is fully funded I’m moving on to a vacation and car fund.
We have three paid for vehicles, but all of them have at least 215,000 miles, so one of them is bound to die soon. My goal is to run our cars into the ground.
I’ve got enough saved to easily replace our car, but I have a feeling the truck is going to be the first casualty, so I need a bit more padding to the account.
When I have something specific like a new used truck in mind, it is much easier for me to put money away.
How I set up my saving accounts:
With my capital one account, I have four different savings account set up. I have my main emergency fund (3-6 months of expenses), my vacation fund, my truck fund and yes, I’m the dork that has a misc. savings account. Aaron teases me about it being the savings account for my savings account.
I have set amounts that are transferred to these accounts automatically each month.
The more you can automate the process, the more likely you are to meet your goals.
Don’t forget to download my Pay Yourself First Worksheet!
How To Pay Yourself First
The steps I’ve talked about above are designed to create savings accounts for specific purposes. The most important account is your emergency fund and then you’ll want to set up accounts for your individual needs.
I also strongly believe in contributing to retirement. I’ve talked about retirement in previous posts and strongly recommend setting up a retirement plan for yourself.
I believe there are three key steps to building wealth.
- The first is to pay yourself first.
- The second is to live within your means.
- The third is to get out of debt and stay out of debt.
If you can do these three things you are setting yourself up for financial freedom.