Pay yourself first
A saving habit of setting aside money for savings and investing as soon as you are paid, before spending on anything else.
What it means
Paying yourself first treats savings as a fixed bill that comes out at the top of every paycheck, rather than saving whatever happens to be left at the end of the month. It is usually done with automatic transfers on payday or with payroll deductions into a retirement plan.
The idea works because spending tends to expand to fill available money. By moving the savings amount out of sight first, the rest of the budget adjusts around it. It works best when essential bills can still be covered, so people with very tight budgets may start with a small percentage.
Example
Suppose your take-home pay is $4,000 a month and you decide to save 10%. An automatic transfer moves $400 to savings on payday, leaving $3,600 for bills and spending.
How it’s used
- Building an emergency fund or down payment
- Contributing to retirement through payroll deductions
- Saving consistently on a variable income
Strengths and weaknesses
Strengths
- Makes saving automatic and consistent
- Removes the need for willpower each month
- Pairs well with an employer match in a retirement plan
Weaknesses
- Can lead to overdrafts if the remaining money does not cover bills
- Saving while carrying high-interest debt may cost more than it earns
- Fixed amounts may need adjusting when income changes
Good to know
- Start small and raise the percentage with each raise.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.