Pay Yourself First – The Surefire Way To Reach Your Financial Goals
One of the most powerful money management techniques to accrue wealth and reach your financial goals is based around a simple three word statement. What is that statement? Pay yourself first.
It’s a mindset and tactical approach to put at the top of your personal finance priority list. This statement has been echoed through the personal finance blog-o-sphere, podcast circuit and pages of books for decades.
However, it’s not always easy to pay yourself first.
The stress and weight of bills can be intimidating. Mortgage payments, student loans, cell phone bills and credit card balances are priorities that draw the bulk of your financial focus.
The age old approach of saving or investing whatever’s left in the account at the end of the month is a common strategy. Often that can end up being less than expected or sometimes zero. This is where the priority of pay yourself first puts YOU and your financial goals at the forefront.
What Does Pay Yourself First Mean?
Investopedia, the Webster’s Dictionary of personal finance, defines pay yourself first as: “automatically routing your specified savings contribution from each paycheck at the time it is received.”
Essentially the first person or bill being paid when you receive incoming money is yourself and your financial goals.
The money comes in and is automatically being distributed to exactly where you want it to go. That might be some combination of your 401k (RPP), savings account, student loans, mortgage, IRA/Roth (TFSA/RRSP), HSA, RESP, day-to-day chequing and other accounts.
The exact distribution priority and amounts is of course very personal. Whether you’re making an annual income of $20,000 or $100,000 and you’re debt free or still tackling student loans, the main point here is that you’re putting your financial goals at the forefront.
Of course you’re still having to cover your monthly expenses within this overall distribution of income. You’re just no longer waiting until the end of the month or quarter to make your next decision on paying off debt, investing for retirement, saving for a down payment or spending to enjoy yourself.
You’re paying yourself and your priorities first.
Why Should You Pay Yourself First?
Whether it’s $100 or $1,000 a month that you’re able to prioritize towards your most pressing financial goal, you’re putting your excess funds towards what YOU want to achieve.
You might be prioritizing saving, investing or getting out of debt.
That’s your choice.
The net benefit is that paying yourself first builds the great habit of ensuring your financial goals are being put first before other expenses and discretionary spending. You’re prioritizing saving, investing, getting out of debt or preparing for the next major purchase in life.
Paying yourself first and continually looking to increase the amount going towards this area of your finances can snowball into a major wealth building opportunity.
You are the first bill you ever pay.
How Do You Pay Yourself First?
As mentioned above, the overall mindset is pretty straight forward. You’re ensuring your personal finance goals and priorities are put at the top of your list of focuses.
Personal finances are personal.
Each and every situation is different but hopefully the framework for decisions and taking control of your money is consistent for most.
These 4 steps cover the general process to pay yourself first.
Step 1: Determine Your Financial Goals
The first thing to building out the pay yourself first plan is to determine your “why”.
What are your financial goals? What are you trying to achieve? Why are you looking to do that? Is there a specific timeline you’re hoping to accomplish this/these goals within?
These goals might be a combination of things depending where you’re at in life:
- Build an emergency fund
- Tackle student loan debt
- Save for a down payment
- Max out retirement accounts
- Reach financial independence in XX years
This will of course be a personal decision that’s unique to your own financial situation.
However, this “why” should be the guiding light that helps determine your priorities when it comes to your money and where it’s allocated.
Step 2: Create A Budget or Monthly Financial Outlook
The next thing you’re looking to do is just establish what your monthly income vs. expenses are. You’ll need to list out all your essential monthly costs.
If you’re using a service like Mint you should have easy access to your traditional monthly spending habits. Otherwise log into 3-6 months worth of bank and credit card statements to find your “average month”.
Try to determine your baseline budget to “live comfortably”:
- Utilities & Services
- Student Loan or Other Debt Payments
- Health & Insurance
- Employer Match 401k/RPP Contribution
What’s left over from your total income minus baseline expenses? Are there any areas you can cut back and create additional excess cash? Will you be comfortable living at this baseline or should you add some buffer?
Ideally you now have a dollar figure that you can use as the “pay yourself first fund”.
You’ve determined the funds necessary to cover all your costs of living and the remainder will be prioritized to reach your financial goals.
The exact endpoint of this cash will of course be connected to step 1.
Step 3: Automate Paying Yourself First
This is the “set it and (don’t) forget it” stage.
You’re leveraging the power of automation and FinTech (financial technology) to pay yourself first.
The most popular starting place of paying yourself first is generally contributing the maximum amount to reach your company’s 401k/RPP match.
Why? This is essentially “free” money and has a baseline 100% ROI as every dollar you invest is matched 1:1 by your employer. You should be able to do this automatically with a pre-determined deduction % taken off every pay day from your employer.
After this, the next decision is of course connected to your “why” from step 1 and amount available from step 2.
The most important thing is to continue the process of automating these “payments” to yourself. Whether it’s to your retirement accounts, high interest savings account, mortgage or otherwise, automate that transfer so that as soon as the funds hit your standard account it’s moved to where you want it.
Don’t let stress, busy schedules, forgetfulness or other distractions in life get in the way of paying yourself first.
Automate it and remove yourself from having to manually do this.
Step 4: Analyze & Review
Finally, as with anything regarding our personal finances, we need to review the progress.
Some of the questions you might be asking yourself as you review the first couple months of implementing your pay yourself first strategy are:
- How tight is money every month? Are you making all your necessary payments on time and not risking any missed payments or taking on debt?
- Is there still excess money at month’s end that could be added into your pay yourself first financial goals?
- Are you tracking towards your financial goals and making progress?
- Has paying yourself first improved your financial situation?
- What areas of improvement are there?
Flexibility and being able to adapt or shift as time progresses will be necessary. As we’ve all experienced, the personal finance journey is hardly a straightforward one. There will be twists and turns along the way where more money comes in than expected or unforeseen costs shift your priorities.
In Closing…Pay Yourself First
Paying yourself first will be one of the best mindsets you can implement into your personal finances. Continually having the approach that “I’m the first bill I pay every month” will ensure that you progress forward. No matter how big or small that progress is, the key is that you’re making progress and actively focusing on your goals.
Long gone are the days of “whatever is left at the end of month will be saved”.
As you start to see your financial goals become a realistic feat of accomplishment or checked off the list once complete, that natural instinct of wanting to push it further and continue to improve will kick in.
That $250 towards retirement or savings every two weeks has successfully been reached for months, “let’s push that to $300” might be a natural voice in your head. “Maybe if I cut back on eating out and bar tabs maybe I can push it to $325”.
And so on, and so on.
That snowball of wealth building starts to get rolling really quick. You’re making momentum with your personal finances and keeping YOU at the forefront of priorities.
Do you pay yourself first?
What strategies or tactics do you use to ensure you’re putting your financial goals first?
Let me know in the comments below.
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