What Is Meant By Paying Yourself First?

What Is Meant By Paying Yourself First?

February 05, 2019

Most of us are guilty of putting others before ourselves.  When it comes to our paychecks, we are just as guilty. The first payments that come out of our hard earned paychecks go to "Uncle Sam", an unavoidable step if you work for an employer.  When you settle down each month to pay your bills, you pay the mortgage lender, utilities companies, and trash collectors. But do you pay yourself? One of the most basic principles of sound investing involves creating the simple habit of "paying yourself first," in other words, rewarding yourself each month with the first payment that comes out of your paycheck. Rewarding yourself by saving or investing that first payment and not going on a shopping spree!

As a country, Americans personal savings rates have varied widely depending on a number of factors such as employment, inflation, interest rates and the general state of the economy, according to Statista. As an example, the U.S. Personal Savings Rate jumped from 3% in 2007 to 11% in 2012.  In 2017, that rate dropped below 3% to 2.4%.

The Genius of Paying Yourself First

Anyone who’s ever managed their own finances knows that saving can be a challenge. Murphy's Law happens. In addition to an endless stream of expenses that demand a piece of each month’s paycheck, something always seems to happen that get's in the way of you putting a little something extra away each month. Herein lies the genius of paying yourself first: you get the cream at the top of the bucket, and not the leftovers at the bottom.

The trick is to prioritize. Make it a point to put your future first. At first, saving may mean a small lifestyle change. But most individuals want to see their net worth increase steadily. For them, finding ways to save becomes more of a long-term commitment than a short-term challenge. Seeing your net worth grow should be your way of rewarding yourself.  It's your future we are talking about.

Putting Your Money to Work

What will you do with the money you save?

If retirement is your priority, consider taking advantage of tax-advantaged investments like your 401(k) and 403(b) accounts.  Also, as an added incentive, some employers offer to match a percentage of your contributions, which are an added bonus to you paying yourself first. As a self employed individual or business owner, open up a SEP account or contribute to your IRA account.

For money you may want to access before retirement, consider placing the funds in a separate savings account. When the balance hits your target, you may want to move some of the money into investments that offer the potential for higher returns. Of course, this may mean exposing your money to more volatility, so you’ll want to choose vehicles that fit your risk tolerance, time horizon, and long-term goals. Regardless of how you are saving, it is to your best interest to make your efforts automatic.  In other words, set your savings contributions so that they come out of your paycheck or checking account automatically each month. Trusting yourself to make the contribution sets you up for failure.

In the pursuit of growing wealth, sound habits can be your most valuable asset. Develop the habit of “paying yourself first” today. The sooner you begin, the more potential your savings may have to grow.

About Terrell Dinkins, MBA, ChFC®, CDFA®


Terrell Dinkins, MBA, ChFC®, CDFA® is an investment adviser representative of and offers investment advisory services through OBN Wealth Advisors, LLC, a registered investment adviser offering advisory services in the State of Georgia and other jurisdictions where registered or exempted. Main Office: 950 Eagles Landing Pkwy, Suite 216, Stockbridge, GA 30281. Tel: 404-723-9780. Website: OBN Wealth Advisors