Pay Yourself First: What It Means and How to Do It | Capital One (2024)
It’s possible to pay yourself first with the following steps:
Establish how much money to save—as a set dollar amount or a percentage of every paycheck—and what to save for.
Consider setting up an automatic transfer for some of each paycheck to go directly into a savings account, retirement account, investment or other savings vehicle.
Create a budget based on what funds will be available after paying yourself first. Monthly expenses and spending can be managed while still tucking money away.
Here are some common savings goals you might consider if you’re paying yourself first:
While three-fourths of Americans have retirement savings, only 40% think their savings are on track, according to the Federal Reserve. Paying yourself first through a retirement account can help build that post-career income.
You might consider whether you’re eligible for work retirement plans, such as a 401(k) or a 457(b). If you’re not, a traditional IRA or a Roth IRA might be options. And those looking to retire early could consider additional ways to save.
An emergency fund is meant to cover unexpected expenses like car repairs, medical bills or loss of income. The Consumer Financial Protection Bureau (CFPB) suggests keeping funds in “one of the safest places to put your money”—a bank or credit union.
An automatic transfer could help grow an emergency fund to reach a set goal. Some employers might offer a direct deposit option that can disperse paychecks into multiple accounts.
Saving for a major purchase
If there’s a vacation, a car, a mortgage, college tuition or another big purchase on the horizon, it might take time to save up for funding that purchase. The CFPB recommends setting a goal amount and then breaking it into steps—like saving $100 a month in gas by biking instead of driving or saving $50 a week by not buying takeout.
One of these steps could also be paying yourself first by putting a certain amount into a savings account every paycheck. By saving just $20 a week, that account could collect over $1,000 in a year.
Generally, “pay yourself first” means what it says—set aside money for savings before paying bills and making other purchases. But it's still important to keep up with debt obligations. Automatic transfers can make it easier to pay yourself first.
When you pay yourself first, you pay yourself (usually via automatic savings) before you do any other spending. In other words, you are prioritizing your long-term financial health.
Cons. Potential downsides to paying yourself first include: Transferring too much to savings: Not keeping enough money in your checking account can be harmful for your finances. Always keep a cushion in your checking account to avoid paying overdraft fees and possibly monthly service fees.
This means putting aside money for your own savings and investments before paying any other bills or expenses. By doing this, you ensure that you're always saving and investing for your future, no matter what else is going on in your life.
The goal is to make sure that enough income is first saved or invested before monthly expenses or discretionary purchases are made. Data from the federal reserve shows that most Americans do not have enough money saved, either for retirement or for near-term emergencies.
“By paying yourself first, you can avoid some of the common obstacles to savings, like overspending and running out of money to put into savings or simply forgetting to put money aside for savings while you focus on other goals,” says Heidi Johnson, director of behavioral economics at Financial Health Network.
Paying yourself first is considered the golden rule by financial planners. You can accomplish it by taking as little as $50 to $100 each payday and putting it into an investment vehicle, such as a savings or retirement account.
One of the most common types of percentage-based budgets is the 50/30/20 rule. The idea is to divide your income into three categories, spending 50% on needs, 30% on wants, and 20% on savings. Learn more about the 50/30/20 budget rule and if it's right for you.
Many financial experts recommend saving 10% to 20% of your income. The amount you save, however, will vary based on your income, expenses and how much time you need to reach your goal.
Introduction: My name is Pres. Lawanda Wiegand, I am a inquisitive, helpful, glamorous, cheerful, open, clever, innocent person who loves writing and wants to share my knowledge and understanding with you.
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