How To Make ‘Pay Yourself First’ Work for You

Pay yourself first. The concept is very simple, yet many of us find it rather hard to accomplish. But this savings method can guarantee savings. Follow these tips to help make ‘pay yourself first’ work for you.

by Gary Foreman

Dear Dollar Stretcher,
Some months I can save some money and some I can’t. I have heard the saying “always pay yourself first”. When I do that it seems that I have to withdraw that money later on in the month to pay the bills. So how does ‘pay myself first’ actually work? Should I always pay myself first? Any help would be appreciated.
James

Why Does ‘Pay Yourself First’ Work?

James is trying a strategy that many people use to force themselves to save money. Instead of saving whatever is left at the end of the month, they ‘pay themselves first’ at the beginning of the month. And, surprisingly, there are a lot of families that swear by this method.

Why does it work? It seems that in nature, certain events will continue until they run out of fuel. Wildfires are an example. They will continue burning until there’s nothing left to consume.

Your expenses can work the same way. Many families will continue spending until all the money is gone. No matter how much money comes in some bill or new purchase will take it. Raises and bonuses all seem to vanish without a trace.

‘Pay Yourself First’ Can Turn a Financial Problem Into an Advantage

In other families, expenses will consume all the money and the credit, too. Again, there will never be any money available after all the monthly minimums are paid. (See Tackling Debt When Bills Exceed Income.)

Paying yourself first turns this problem into an advantage. If you take 1% of your income and put it in a savings account at the beginning of the month, the amount of money available for spending is less. At the end of the month, you’ll wonder where all the money disappeared. Just like you do now. Only this time you’ll know where at least 1% of it has gone. It’s sitting in a savings account earning interest.

For some people, this plan works wonderfully. Their spending seems to automatically adjust without any real effort. They have a little less in their pockets and so they spend a little less. One less candy bar or impulse buy. It just seems to work out. Gradually they begin to accumulate savings. Unfortunately, James doesn’t appear to be one of those people.

Remember, the idea of ‘paying yourself first’ doesn’t create any magic. You’ll still get a bill from the electric company each month. And they’ll expect you to pay it.

Why ‘Pay Yourself First’ Might Not Be Working for You

James’ problem could be in a couple of places. Perhaps he’s getting to the end of the month and his money and won’t cut back on unnecessary expenses. A certain amount of self-discipline is required. You need to resist that candy bar. Empty pockets are an acceptable part of the deal and an incentive to stop spending.

Another possibility is that James has tried to save too much. It could be that he hasn’t left enough money to pay for the basic monthly expenses. In that case, he’ll either need to make some adjustments to his basic expenses (like selling a second car) or plan on paying himself less each month.

Unexpected repairs and expenses could also be sinking James’ plan. You know the kind I’m thinking of. The ones that we all know will happen. We just don’t know when or how much they’ll cost. Home and auto repairs are often the culprit.

Your budget plan needs to cover this type of expense. Put some money away each month for these ‘big hit’ expenses. If your car is getting old, protect yourself by putting $100 away each month. You’ll need it for that ‘unexpected’ $1,000 repair bill.

Where You Put Your Savings Can Make a Difference in Your Success

Where James puts his savings is important, too. It’s wise to have two savings accounts. One that’s readily available for those big hit expenses. Don’t use this money for a fishing boat or a new spring outfit! It’s for repairs and expenses that you cannot avoid.

The second savings account is your long-term savings. It should be harder to get at. Only take money out in a true emergency. This money should be for long-term goals like a college education or retirement.

Should You ‘Pay Yourself First’ or Pay Down Debt First?

There’s a question that James didn’t ask that could affect his success. That’s whether it’s better to put money away in savings or to pay off credit card balances first. Does it make sense to put money in a savings-type account earning 1% when you’ll be paying many times that much in interest on your credit card balance?

Some people think so. They believe that once you’ve started to save money you’ll continue to save. And there’s some truth to that. Using your savings account for unusual expenses gets you out of the habit of reaching for a credit card when a crisis occurs.

But, it does seem a little crazy to be borrowing money at a higher interest rate than you’re getting on your savings. Achieving a debt-free lifestyle is important, too.

There’s another way to look at the issue. Reducing your debt is a way of saving money. For every dollar that you repay this month, you’ll reduce next month’s interest charge. So you’ve saved money by paying part of your credit card balance.

Sure, the next time your car breaks down you’ll probably need to pull out the plastic to pay for the repair. But, if you’ve developed the habit of reducing that balance each month, you’ll get right back on track.

The Best Time To Start Paying Yourself First

One final thought. Starting a ‘pay yourself first’ program is always easiest when you get a raise in pay. Just take the increase and put it in your savings account. You’ll still have the same amount of money available as you did last week. But, don’t let the lack of a pay raise keep you from starting. You can begin with $10 this month. Most of us spend that much impulsively sometime during the month. (See How Saving $2.75 a Day Can Change Your Life.)

Should James continue to pay himself first? That depends on what he hopes to accomplish with it. If he’s looking for the strategy to magically reduce his mortgage payment he’ll be disappointed. But, if he’s hoping to give himself that little extra incentive to reduce expenses at the end of the month, he’ll do quite well.

• Using Compound Interest To Boost the Rate of Return on Your Savings
• Finding Money for Savings While Paying Off Debt
• 8 Reasons You Don’t Have an Emergency Fund
• Reduce Your Debt With a “Sinking Fund”

Reviewed March 2024

About the Author

Gary Foreman is the former owner and editor of The Dollar Stretcher. He's the author of How to Conquer Debt No Matter How Much You Have and has been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.