Money Saving Tips – Pay Yourself First

By on Jun 10, 2013 | Personal Finance | 12 comments

Money Saving Tips – Pay Yourself First

Saving money may seem like a big challenge, especially if you are caught up in the spending frenzy of our consumerist society. But if you cool down and think, it’s not difficult to find ways to save money. Our regular money saving tips series highlights simple strategies you can use to help you. This week we look at a piece of advice you probably heard before – pay yourself first.

What Is “Pay Yourself First”?

The pay yourself first principle was first explained by George Clason in his classic The Richest Man in Babylon – one of our recommended finance books. Since the book’s original publication in 1926, the phrase “pay yourself first” has been thrown around by many financial advisors. But what does it really mean?

Pay yourself first is a financial principle that involves saving money (paying yourself first) before spending it. It means you make the contributions to your saving funds and investment portfolios a priority. You don’t let frivolous spending eat away at your paycheck and jeopardize your financial future.

How Can This Help Me Save Money?

The enemy of saving has always been spending. Saving money would never be a problem if our poor spending habits didn’t get in the way.

The pay yourself first principle can be very effective if applied consistently. By saving and investing your money first, you ensure that your savings and investing obligations are met every month. You force yourself to save money, even if that’s not something you would normally do.

Getting Started with Paying Yourself First

So what’s the best way to implement the pay yourself first principle? First, you need a budget. A monthly budget will help you figure out your income and expenses. When listing your expenses, it’s important to distinguish between those that are necessary (like debt repayment, rent, bills, groceries, etc.) and those that are not (eating out, alcohol, entertainment, new clothes, etc.). Always try to minimize your unnecessary expenses.

After you have a budget, determine what you are going to do with your extra cash flow. Does your emergency fund need a boost? Do you need to start saving for next year’s family vacation? What about your retirement portfolio? Those are all great financial goals to work for. Set a monthly amount you are going to save or invest.

The pay yourself first principle dictates that you put money in your savings accounts or investment portfolios as soon as you get each paycheck. To help you with that, set up reoccurring automatic transfers. Almost all banks and other financial institutions offer this service. For a list of some excellent savings account options, check out our best savings accounts page.

Schedule the transfers to your savings accounts or investment portfolios immediately following your paycheck deposits. This automatic system will force you to pay yourself first and leave no room for your spending tendencies to get the best of you.

If you missed our previous article in the money saving tips series, you can read it here (it covered how keeping your lifestyle unchanged after a pay raise can help you save more money).

Do you pay yourself first? Are you consistent with it, or is it something that needs improvement? What is the best method you found that helps you stay on track?

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12 Comments on “Money Saving Tips – Pay Yourself First”

  1. Thomas | Your Daily Finance

    You have to pay yourself first…well you don’t have to but it one of those things people should be doing. We set up our budget and the first things are 401k, savings, and emergency funds. We let all other things come after we determine what we are paying ourselves. The wifey and I are very consistent and we need to increase the amount at this point.

    • Anton Ivanov

      I completely agree with you that everyone should be paying themselves first. It’s hard to find money to save and invest when you spend the majority of it. But if you establish a schedule and set up automatic transfers into your savings, with time you won’t even miss that money.

      Thanks for stopping by and leaving a comment!

  2. The Phroogal Jason

    Yup, you have to pay yourself first and the best way to do so is starting with a budget and determining how much you can pay into your retirement and lifestyle goals. I’ve been pushing for the end of the culture of debt and the habit of spending (the enemies of saving), in favor of a saver’s approach to purchasing and living.

    • Anton Ivanov

      A budget is a great way to start saving more money, since it can help you find areas of overspending. Thanks for stopping by and leaving a comment!

  3. Krista

    It sort of falls inline with the whole ‘put the rocks in the glass first or else they’ll never fit’ idea. If you wait to save until after you’ve done everything else you’d like to each month – the money will never get there. Just make it a priority and actually include it in your budget and you can surprise yourself how easy saving can be. Thanks for this post.

    • Anton Ivanov

      Krista, that’s a great analogy, I didn’t think about it before! It’s all about priorities and figuring out what’s actually important in your life.

      Thanks for stopping by and leaving a comment!

  4. Jeffrey James

    I’m glad you highlighted the importance of having a budget — because if you don’t have a budget, you won’t even know how much to pay yourself!

    • Anton Ivanov

      Very true. Making a budget is one of the best ways to control where your money is going!

  5. Hunain @ HowToSaveMoney.ca

    Saving for me is a myth because whenever I try to save money something comes up in my life and I have to take money out of my savings account. I have created a budget three times but that didn’t work so I have to do it again and again. I will try again this month to make a good budget and stick to it so I can put some money aside.

    • Anton Ivanov

      You bring up a good point that everything related to finance requires discipline. If you do not have the discipline to live by a budget and put your money where you planned to put it, instead of spending it, then it will be very hard for you to reach your financial goals.

      Good luck, and I hope you will stick to your budget this time!

  6. Imran @ Xomba

    I can definitely relate to this tip, for years I paid myself last and thought I was doing pretty good. It’s only after I started reading personal finance books that it dawned on me to pay myself first. I try to save 50% of my income and use the rest on my expenses. If I struggle, then it’s up to me to cut my costs and increase my income, it’s as simple as that. Great post Anton, really inspiring.

    • Anton Ivanov

      50% is a really good savings rate. More than the vast majority of people ever achieve. Great job!

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