How To Pay Yourself First

The most common savings method. See what it means to pay yourself first.

If an emergency came up, do you think you would have the funds to cover it? Do you have money saved to set you up for financial success in the future? If you are like many Americans who have a small savings account or potentially nothing saved at all, it can be challenging to figure out how to get it started.

What Does It Mean to Pay Yourself First?

Paying yourself first is an easy concept: whenever you get paid, place a designated amount in your savings account first before you do anything else. This means before you pay bills, pay off debts, buy your groceries or any spending that you typically do.

The purpose of doing this is to establish a savings habit and take funds out before they have the opportunity to be spent. Oftentimes, we pay our bills first and set money aside from some activities, and it can seem like savings funds get lost in the mix of it all. By paying yourself first, you're taking those funds out before anything else. It will take some discipline and planning, but it's important to understand how to implement the method into your routine.

How to Pay Yourself First

Step One: Assess Your Spending

To figure out how much money you can set aside each paycheck, you need to look at your most recent paystubs. It's best to look at about two months worth of paychecks; this will give you an idea of the average amount you earn after-tax.

Once you have that amount, you need to subtract all of your needs from it. Needs include items like rent, utilities, debt payments, prescription costs, and so on; essentially anything that would negatively affect your livelihood if you couldn't pay it. The amount you'll have leftover is what you will split between your needs and savings. Take a good look at what you are spending your funds on, especially if you can cut any of them and put those leftover funds in your savings.

Step Two: Determine How Much to Pay Yourself

A good rule of thumb is to place about 15-20% of your after-tax income into savings, so this may mean you'll have to cut back on some of your other spendings. After you've assessed your income and spending habits, you'll be able to figure out whether that threshold is doable for you or if you need to designate another amount.

Keep in mind that even if you can't meet that amount starting out, the important thing is that you're beginning your savings journey. It doesn't matter if you're saving $20, $200, or $2,000 right off the bat as long as you are realistic based on your income and essential purchases.

Step Three: Establish a Savings Account

You'll need a place to stash the cash if you don't have one already. Check out multiple financial institutions (both banks and credit unions) to compare offers. Be sure to check on items such as if they're FDIC or NCUA insured (this will protect your funds in case the financial institution runs out of money or closes), fees, minimum account balance for opening, and their online banking systems.

Once you have an account established where you will be putting your funds, you can put funds in there by several different methods. First, you can transfer funds from your checking account as soon as you get paid; this is especially simple if your savings and checking are attached. Secondly, you can check to see if you can establish direct deposit with your employer to deposit your designated amount into your savings; this will eliminate an extra transfer step for you.

Step Four: Don't Touch It

It's important to practice good discipline when it comes to your savings account. It can be very tempting to dip into your savings account to pay for impulsive purchases. If you think you may be too tempted to touch your savings account if it is linked to your checking, consider opening up a new savings account at a different bank. That way, there will be extra steps to access those funds.

Go one step further and check out some high-yield savings accounts that a few financial intuitions offer; they may make your money work for you a little better.

If you're stashing money away into an emergency fund and you have to touch it, make sure you diligently work to replenish those funds before putting savings anywhere else.

Step Five: Watch Your Savings Grow

By sticking to your goals, you'll be able to watch your savings account grow before your eyes every single month. It's important to understand that you don't always have to designate a specific amount just to a savings account. Consider other options as well, like small investments, or see if your employer has a 401(k) match program where they'll match your contribution dollar-for-dollar.

The Bottom Line

You don't need copious amounts of cash to start a healthy savings account. Like we mentioned earlier, the most important factor is that you're starting at all. This method can help you build those healthy financial habits and make sure that you're covered in an emergency. 

To get started, apps like Monorail can help you plan your saving and spending. See how Monorail can help you pay yourself on auto-pilot.

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