Tips on Saving: Pay Yourself First

Whether you are trying to get out of debt or are developing your nest egg, your first step to both is to pay yourself first. Lucky you, right? Well, this really can be just as easy as it sounds.

However, it is not nearly as fun as it sounds. The idea of paying yourself first simply means that you will work on a percentage basis to allocate your funds, not that you will spend money on whatever you please. Bummer? Not so much. When you pay yourself first, you are putting as much of your cash toward saving as possible to spend on bigger things (like retirement) later.

Still a little confusing? Let me illustrate by sharing my personal story about paying myself first to get out of debt.

Paying Myself First

When my husband and I first decided that we wanted to get out of debt, we had an additional struggle: both of our incomes were not constant. Therefore, the most feasible way to for us to create a budget was through percentages, not fixed amounts. Once we decided on percentage-based budgeting, I immediately developed a very simple spreadsheet. In this spreadsheet, 25% of our income went into savings right away: we paid ourselves first for our futures.

Breaking it Down

Then, from what was left, 50% was allocated for bills. If our minimum payments were under this amount, I used the extra to pay down the highest interest loans. The remaining 50% was then left in our bank accounts for spending money.

Breaking it Down Further

From that spending money, 25% was allotted as “play money,” which we split between ourselves. This cash gave us the freedom to spend without consulting one another. The remaining pesos left in the account were deemed "responsible money," slated for necessities like food.

The Learning Experience

Basically, we learned through this exercise that saving and budgeting is possible on a varied income: it’s not how much money you bring in but what you do with that money that matters. Paying yourself first is one of the best ways to become financially fit.

Also, when you pay yourself first, it doesn’t seem like you’re scrimping as much. Just like when you’re on a diet, the only way to know that you’ll stick with it is to feel satisfied. If you leave yourself feeling deprived for weeks on end, you end up bingeing — or over-spending.

What about you: How do you pay yourself first?

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Anonymous's picture

Ravi Gupta wrote:

Fri, 04/22/2011 - 12:24 Comment #: 1

When I first recieve my paycheck I automatically transfer a large chunk of it to another account that I don't have immediate access to (no debit card, no checking, nothing but ACH transfers). From there I put about $100 in my checking account and say "go out and live". It's tough but it gets the job done.

-Ravi Gupta

Anonymous's picture

MoneyCone wrote:

Fri, 04/22/2011 - 12:52 Comment #: 2

That's a very good point Jessica! I wish more people thought in terms of percentages rather than absolutes!

Pay $2.50 as ATM fee for $50 withdrawal? No way - that's 5% !

Jessica Schmeidler's picture

Jessica Schmeidler wrote:

Fri, 04/22/2011 - 23:15 Comment #: 3

Ravi- When my husband and I really started to focus on paying things down, sometimes $100 to live on per month seemed like a windfall. Every once in a while, we still go the store and buy food for the month limiting ourselves as if we only had that $100. Sometimes being behind really teaches you how to live once you get ahead.

MoneCone- Absolute values seem more taxing emotionally, too. Even when we had conistant incomes, it was easier to put away money when we looked at them as percentages. As far as the ATM fee... when you put it that way, WOW! :)

Anonymous's picture

retirebyforty wrote:

Sat, 04/23/2011 - 16:46 Comment #: 4

We auto deduct for 401k. That's the way we pay ourselves first. If we have money left over at the end of the month, then that goes into our investment account as well.
We allocate $100/week for cash allowance and we use that on discretionary spending and it's working out pretty well.

Anonymous's picture

Spruce Up Your Finances wrote:

Sat, 04/23/2011 - 16:49 Comment #: 5

Great tip. What I like about the 401k at work is that the company is already doing this for us, they take the money out first so we do not really feel the pain.

It is always a great idea to start your budget after you have accounted for your savings plan first or "paying yourself first" since it is human nature that we won't have any leftover if we "pay ourself last."

Jessica Schmeidler's picture

Jessica Schmeidler wrote:

Sun, 04/24/2011 - 04:30 Comment #: 6

RetireBy40, except for the 401k (we're both self-employed), you sound just like us. That's kind of exciting for me to say knowing your retirement goal. ;)

Jessica Schmeidler's picture

Jessica Schmeidler wrote:

Sun, 04/24/2011 - 04:33 Comment #: 7

Spruce Up Your Finances-- I think it's amazing how much of a mental game finances truly are. It's like debit cards versus paying with cash, you really feel the latter more. It's all the same money, but learning to control our money rather than letting it control us was quite a big step once we decided to take it.

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