Paying Yourself First: The Ultimate Payday Hack

What up fam! How are we doing? Today I want to talk about the concept of “paying yourself first”. We’re all taught from a young age that being selfish is bad. But when it comes to our money, it’s okay to be selfish! We SHOULD be prioritizing ourselves on payday. Paying yourself first means you’re prioritizing your long-term financial stability over any immediate wants. Sounds pretty good, huh? 

This simple concept can completely change your financial outlook, and I’m so excited for you to try it. It’s one of the BEST things I ever did with my finances, and I think you’ll find it just as crucial in your life. 

The best part? This simple concept will only take you about 10 minutes each payday to implement. Changing your financial outlook in just a few minutes every month? Sign me up!

What not to do (a.k.a. Mistakes were made)

Using my younger self as an example, my paycheck was generally allocated like this:

Income → Expenses → Savings

As soon as my paycheck hit my account, I used that money to help pay for my fixed expenses – things like my mortgage, home insurance, gym membership, car payment and car insurance. 

After that, I had a chunk of money left over for my variable expenses – utilities, groceries and “fun money” for things like eating out, going to the movies, weekend trips, etc. 

At the end of the month, I opened up my bank accounts and decided whether I had any money left over to transfer to savings or to set aside for any other financial goals. If I did, great. If I didn’t, I moved on without thinking much about it. 

Addressing my financial goals at the END of the month nearly always ensured NOTHING was accomplished. I rarely moved the needle on my savings amount. By that time in the month, my fixed and variable expenses had already gobbled up any remaining money I had.

I wasn’t doing anything wrong, necessarily. I lived within my means, and I wasn’t racking up any more debt. 

HOWEVER, I also wasn’t experiencing any progress or growth. I had it all backwards, and I was the definition of “treading water”.

What to do (a.k.a. There’s a better way)

Moving on, let’s explore a different approach for allocating our paychecks.

Income → Savings → Expenses

With this approach, the paycheck is immediately allocated to any savings goals we have FIRST. 

Paying yourself first doesn’t mean we’re paying ourselves a salary. Paying yourself first also doesn’t mean only stacking our money up in a savings account. It means we’re immediately setting aside our income toward our financial goals. This could be things like:

• Building a 3- or 6-month emergency fund
• Increasing your 401(k) contributions in your employer plan
• Setting aside money for upcoming expenses (car or home repairs, registration renewals, doctor’s appointments, tuition, birthdays or weddings, etc.)
• Paying down debt
• Investing in an IRA or taxable retirement account

Related post: The Personal Finance Ladder: Prioritizing Your Financial Goals

After we’ve transferred or earmarked the funds needed for our savings goals, we can evaluate how much is left for fixed expenses. 

And then, when we calculate the remaining amount, we know how much is available to spend on variable expenses for the month. 

Related post: Creative Ways to Minimize the Big 3 Expenses

Before you shake your head and say, “sounds great, but I can’t afford that”, let’s chat. This does not have to be a monumental shift in the way you’re using your paycheck. This can be an extra $10 or $50 a month going toward your financial goals. Any amount is better than no amount. The only thing that matters is that you’re building up the habit of paying yourself first.

Why is paying yourself first important?

Now that we understand the concept, let’s talk about why it’s a good habit to build. Let’s see if I can convince you to try this out!

First things first, paying yourself first allows you to prioritize your future financial stability by using the money you have NOW to ensure you’ve got a healthy financial foundation. You deserve this, my friend. You are WORTH prioritizing. Not only that, there are plenty of other reasons to pay yourself first:

It creates good saving habits.

By removing that money immediately from view, you’re eliminating any temptation you might have to revert to your old ways, or to allocate that income to things that don’t serve your future. 

Related post: How to Find Immediate Money Savings

You have to be thoughtful about spending.

At the end of the month, it’s natural that you’ll have a little bit less money left available for spending. With that adjustment, you’ll have to be a little more thoughtful about where you’re spending money and what you’re spending that money on. It’s not a bad thing! I’ve learned when I’m faced with a limited number of dollars to spend each month, I put it toward the experiences and things that mean the most to me. 

Related post: How to Save Money Without Killing Your Joy

It can insulate you against financial crises.

If you’re already building this habit, and you’ve gotten accustomed to living on far less than you earn, when a financial crisis pops up, you’re going to be the MOST equipped to handle it. Yes, you! You can use the funds you’ve been setting aside to help mitigate the negative impact. OR you can pivot from funding your savings goals to addressing the crisis in front of you. You’ve got options, my friends!

Related post: Pandemic Survival Tips

You will build tremendous wealth.

The impact you’ll have will shock you. The most fun part is watching your savings or investing accounts increase, or watching your debt decrease. 

At its core, this exercise is all about increasing your savings rate. And as we know, your savings rate plus time in the market is what determines how long we all have to work before retirement. That’s a pretty good incentive on its own, right?

You will break the paycheck-to-paycheck cycle.

Because you’re paying yourself first, suddenly, you’re going to wake up with money in the bank. A cushion for you to fall back on. You’re building good money habits and setting yourself up for long-term success. Ahhhh! Feel that? It’s true peace of mind.

OK, I’m convinced. How do I get started?

You’re ready to implement this in your own financial life. That’s terrific news! Congratulations. Now let’s talk about the best way to execute on paying yourself first.

You have to track your income and expenses.

I know, I know. It’s not the sexiest thing in the world, but it might be one of the most important. You don’t know where to start with your savings goals until you understand your income and expenses.

Set a goal.

Do you want to knock out that credit card debt? Save up 6-months of expenses in an emergency fund? Get ahead of the paycheck-to-paycheck cycle? Lay the groundwork for retiring early? Identify the goal you want to work toward. I suggest writing that goal down and putting it somewhere you see it daily. 

Start small.

Try it out by allocating just 5% of your income to your savings goals. Or, if that’s too much, back it up to 1%. Work your way up from there! There’s no correct starting place – only the starting place that works for you. Once you feel comfortable with more, tap the gas and watch the money add up!

Automate your savings.

Automating your finances is a hidden weapon I encourage everyone to implement. Ramit Sethi preaches automation in his book (one of my favorite personal finance reads), and after trying it out myself, I’m an automation fangirl. Automating your savings can be done a number of different ways, but I want to highlight two specific options:

1. Ask your employer to help: You can do this by increasing your contributions to the employer-sponsored retirement plan or HSA. Another way for your employer to help you is to ask them to automatically allocate some of your paycheck to your savings account. Separating the money from the start removes any possibility of short-changing yourself down the road.
2. Set up automatic transfers: Decide on an appropriate date or two during the month on which your bank will automatically move your money to your savings account. Or set up automatic withdrawals through your brokerage account.

Track your progress.

Don’t skip any opportunity to celebrate your accomplishments. Check in on your goals regularly and celebrate all of the milestones you’re crushing. Often, seeing the numbers increasing (or decreasing, in the case of debt payoff) so quickly is all the motivation we need to double down.

Keep going.

Don’t stop. You’re absolutely slaying it. Once you’ve hit the first goal, set a second and keep going!

Avoid lifestyle creep.

If you really want to turbocharge your financial journey, avoid increasing your expenses as your income increases. Keep paying yourself first. Consider living on the same take-home pay no matter how much your income grows. Expanding the gap between your income and expenses will set you up for ultimate success.

In conclusion

Listen, I don’t think money is the most important thing in life. In fact, I think money is FAR from the most important thing. However, financial stability creates opportunity for you to live your life the way you want to. And at the end of the day, my friends, that’s the thing I want the most for you. Paying yourself first is an important stepping stone on that journey, and I encourage you to give it a try. I think you’ll find that prioritizing your financial goals results in some incredible growth and progress!