Pay Yourself First If You Ever Want To Get Ahead Financially

Chances are you’ve heard this phrase before “pay yourself first”.

Maybe from a personal finance book, blog, a friend or family member.

Perhaps you’re already doing it yourself or maybe you’re still unsure of what it exactly means.

Let’s dive in a bit deeper to see how such a simple idea can absolutely revolutionize your finances.

What Does It Mean To Pay Yourself First?

To put it simply, whenever you bring in any sort of income whether it’s a paycheck from a job or profit from your business, you will want to set aside a portion of that money in a savings account and/or investment account FIRST, before you spend a dime on anything else…even your bills!

The ones who grasp the concept above and actually implement it over the long-term almost always end up wealthy.

Pay Yourself First Definition

The simplest and best way to describe paying yourself first is to just sketch it out quickly like I did below. Most people follow either the first or second example.

So it should look something like this (rich people):

Paycheck/business profit ==> portion in a savings/investment account ==> bills/expenses ==> anything left over for entertainment/personal etc.

The problem is that most people have this totally backwards which is why they are broke.

Their process looks more similar to this (poor people):

Paycheck/business profit ==> entertainment/personal ==> bills/expenses ==> have nothing left over to save or invest

You want to be the first example in green and not the second example in red.

I know what you’re thinking…this is so easy that it’s silly.

Well yes, and that’s the beauty of it.

You really don’t have to think all that hard to become a good saver and increase your net worth over-time.

The problem is people may understand the above example but they don’t actually do it.

The good news is that we can use technology today to our advantage when saving money as this will put the process on complete autopilot.

A simple example of this is if you contribute to a company 401(k) or something similar.

If you have automatic deposits set up, a portion of your paycheck will go into your 401(k) without you even seeing it.

That’s paying yourself first!

If you don’t have the luxury of a 401(k) or are self employed, you can seamlessly set up automatic payments to mostly all of your different savings/investment accounts.

This makes saving money almost impossible NOT to do!

Let me make one note here…and there’s two schools of thoughts on this.

About debt…

I hate debt and would recommend that you pay off any debt you have (minus a home mortgage) before you begin paying yourself first.

I guess I would say, pay your debt first instead.

To start, save enough money so you have a cushion for emergencies and throw everything else at your debt.

Once you’re clear and free from the burden of debt, you can really start building some serious wealth by paying yourself first.

So How Much Should You Pay Yourself First

Well this really all depends on your current circumstances.

I have always been a big saver/investor and tend to put a larger portion of my income away than the average person.

Think of it this way.

The more money you put away, the quicker you will reach financial freedom where you ultimately have the choice of working or not.

When your investment income exceeds your expenses on a monthly/yearly basis, you are technically free from working.

With that being said, the absolute minimum amount I recommend saving is 15% of your income.

So let’s say you make $50,000 a year and you save 15% of that total…You would be able to put away $7,500 for the year.

Not too bad right?

Well let’s say you’re strange like me and save 50% of the total income of $50,000…You would be able to put away $25,000 for the year.

That’s $17,500 more per year when saving 50% compared to 15%!

Compounded over-decades and that could mean hundreds of thousands of dollars, if not millions more to your name.

The higher percentage of your income you can afford to invest, the better.

But remember it all starts with paying yourself first and valuing your hard earned money and not wasting it.

You might be surprised just how quickly this adds up once you get into a rhythm and track your results.

When it comes to finances you need to have both discipline and patience.

It may not be sexy but it works!

Do you currently pay yourself first?