Pay Yourself First for Financial Freedom

Written by on June 8, 2012 in Money - No comments | Print this page


How to pay yourself firstWant to get rich?  Want to become self-sufficient?  Well stop buying lottery tickets, day trading, house flipping and practicing for the NBA.  Those are losing gambles for all but the very lucky and the very talented.  But there is one very simple rule that if followed will always grow your net worth.  It is safe.  It is a certainty.  It is simple.  It is The Golden Rule of Personal Finance.

That rule is to always pay yourself first.

I’ll say it again, because it is that simple.  Always pay yourself first.

Paying yourself first is a simple concept.  Just decide how much you should be saving every month.  Then charge yourself that much money every month, just like a bill.  Make this your most important payment. You should make this savings payment to yourself before buying televisions or electronics, before paying your car payment or buying groceries, even before you pay your electric bill or rent.  Always pay yourself first!

Why Can’t I Just Save At The End of The Month?

When you get out on your own for the first time, savings seems like a distant dream.  With an entry level job making rent, car payments, finding food, and paying all your utilities can seem like an overwhelming task. It is human nature to always buy just a little more than you really need; there is always one extra trip to the vending machine or one extra latte in the morning.  Saving at the end of the month might be nice goal, but when the time comes you will most likely find that you don’t have any money left over. After paying for what you need and for what you want there is just no money left over.  So savings becomes something that is put off into the future, when you will make more money.  The problem is the future never comes.  No matter how much money you make, there is never enough to pay for all the things you want and need.

If you plan on saving at the end of the month your priorities will always be needs, wants, then savings.  If you ever want to save and develop a sound savings policy your priorities need to be savings, needs, then wants.

You have to develop the habit of always paying yourself first right now.  If you don’t, there are always going to be things to spend money on: getting your car fixed, a vacation out of town, help out a friend or any one of life’s countless extra costs.  But even when those extra costs start popping up most people still find a way to pay their bills.  So think of your savings as a bill, and you will always find a way to pay it.

To summarize there are three very important reasons to always pay yourself first.

  1. By paying yourself first you are mentally making savings a priority.  Every time you pay yourself before paying the rent or buying groceries you are establishing in your own mind that saving is just as important as those items. Saving becomes a habit that will stay with you for the rest of your life.
  2. By placing savings above bills and fun you are preparing yourself financially for further money growth.  We live in a capitalist society where money is used to produce more money. The only way to take advantage of that is to have money to get started with.
  3. Everyone needs a nest egg, a life savings.  Bad things happen; it is a fact of life.  Having savings enables people to deal with emergencies, keep the house, pay the hospital, etc without having to crush themselves with heavy debits.

Alright,  How To Pay Yourself?

Two words: Direct Deposit.

The best and easiest way to start saving is to simply lower your income by placing some of it into a different bank account. An account you avoid looking at.  If you never see the money then there is a lot less pain in having to part with it into a savings account.  If you work at a job that allows it, split your check up between multiple accounts.  Keep the money out of sight; keep the money out of mind.

There are multiple reasons to save.  Some savings should of course go to retirement, but there are other reasons to save.  You might want to save to buy a house, a car, or a horse.  You might just want to have cash on hand for emergencies.  You might want to save to develop wealth that can grow for you.  Since money is being saved for different reasons it stands to reason that there are multiple ways to save.

  • A 401K is a very good retirement plan.  If you have a job that has a 401K, enroll in it right now.  If your employer doesn’t offer one, consider finding a new job.  Not only will your 401K grow with investment, you will get what amounts to free money whenever your employer matches the contribution.
  • A Roth IRA is another good retirement plan.  Also, they are a great investment tool as they allow investments to grow tax free.  A good Roth IRA with a good rate of return will quickly begin growing on its own.  If begun early a Roth IRA can lead to massive growth in wealth.
  • Find a high interest savings account.  At some point you will need to access cash quickly.  That is why it is a very good idea to place a set amount of money (either a specific amount, e.g. $20 a week, or a percentage of income) into a checking account every month.

Anyway you do it, remember, always pay yourself first.  Make your payment into savings before paying any other bills.

The problem most people have is figuring out how much to save.  The answer is, as much as you can.

Start small if you have to.  Put $20 a week into a savings account.  Then slowly grow the amount you are saving until you reach the limit of what is doable.

An easy trick to increase savings is to not allow yourself to get a pay increase.  As you advance in your carrier; you will get raises.  Take all of the extra money you are getting and place it into savings.  Again, if you can do this before you ever see the check.  If you are already living off the money you make now, you can continue doing so well into the future.

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About the Author

Matt Brand

Matt Brand is QLR's money saving expert. His experience with credit cards and student loans have made him take a strong interest in personal finance, saving money and sharing his knowledge. He is passionate about teaching others how to avoid the trap and make smart financial decisions. View all posts by Matt Brand.