Building long-term wealth can be considered a goal, but it’s more closely akin to a lifelong journey without an end date. And long-term wealth isn’t merely sitting on a pile of cash, but rather having the funds to live life on your terms. But to achieve that long-term wealth, it can’t simply be money-in and money-out. You have to find ways to put money away for yourself before you pay your bills.
While this is a goal for many, it’s only practiced by some. Less than half of working-age Americans have any retirement savings, according to 2020 Census data.
But if you’re able to prioritize putting money in your pocket first, you give yourself a solid chance of growing a plentiful nest egg for the future.
Here’s how you can benefit from paying yourself first throughout your financial journey.
Prioritizing your financial future
Paying yourself first sends a clear message to yourself: your financial future matters. It's all too easy to put off saving and investing, thinking that you'll start when you have more income to spare. However, this approach often leads to procrastination and missed opportunities. By making saving a priority, you demonstrate your commitment to your long-term financial well-being. This mindset shift can positively impact your decision-making, encouraging you to make choices that align with your future goals rather than short-term impulses.
Forced savings discipline
Life is filled with financial demands, from bills to unexpected expenses. By paying yourself first, you create a financial safety net that acts as a buffer against these unpredictable circ*mstances. This disciplined approach ensures that a portion of your income is consistently put away, helping you avoid the pitfalls of overspending and living paycheck to paycheck. Treating saving as a non-negotiable expense ensures that you remain committed to your financial goals even when faced with tempting discretionary spending.
Using compound interest to your advantage
Compound interest is often referred to as the "eighth wonder of the world" for its remarkable ability to accelerate wealth growth. By paying yourself first and investing those savings inside a retirement account like a 401(k), you give compound interest the time it needs to work its magic. The longer your money is invested, the more it can grow exponentially. Over time, even small contributions can snowball into substantial wealth.
Hedging yourself against inflation
Inflation has been in nearly every financial headline the last few years as Americans have grappled with rising prices on nearly every purchase they make.
Prices on goods have risen 17% since 2020, and while many consumers have cut back their spending — paying yourself first is also an effective method to fight inflation. For example, instead of spending money unnecessarily on goods today, you can put your money to work in the stock market. The growth you could potentially experience can be a way to fight back against the everyday rising costs.
Protecting yourself against financial uncertainty
Economic fluctuations are a natural part of the financial landscape. Recessions, market downturns, and unforeseen events can impact your financial stability. By paying yourself first and building a strong financial foundation, you create a buffer that helps you weather economic storms. An emergency fund, for instance, can provide peace of mind knowing you have resources to fall back on in times of need. Moreover, having investments diversified across different asset classes and industries can mitigate risks associated with market volatility.
Bottom line
Paying yourself first isn't just a financial strategy, it's a mindset that empowers you to take control of your financial future. By making saving and investing a top priority, you're setting the stage for long-term wealth accumulation and financial security. This discipline not only safeguards you against unexpected expenses but also enables you to leverage the power of compound interest to your advantage. As you prioritize your financial future, you send a clear message that your goals matter and that you're committed to achieving them. Additionally, paying yourself first provides a buffer against economic uncertainties, allowing you to navigate challenging times with confidence.
FAQs
It means putting 20% of your income toward savings and 80% toward everything else. Paying yourself first can be effective because it ensures you save something every pay period, and it reduces the chance that you'll spend money you intended to save.
What does paying yourself first mean in personal finance choose 1 answer? ›
Answer: Paying yourself first means that when you get a paycheck, tax refund, cash gift, or other money you should put some of that money in a savings account before you pay your bills.
What does paying yourself first suggest? ›
Key takeaways
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.
Which best describes the advice of pay yourself first? ›
Paying yourself first means that when you get a paycheck, you put some of that money in a savings account before you pay your other bills.
What are the benefits of paying yourself? ›
If you make a habit of depositing or moving money into your savings account every time you are paid, you may be less likely to spend it on your everyday expenses. This practice can help you foster a habit of saving that will add up over time and help you be prepared for large or unexpected expenses.
Why is there value in paying yourself first? ›
Paying yourself first encourages sound fiscal habits. By automatically deducting a portion of your income, you can set the money aside before you can find ways to spend it. Still, it's important to be practical. It's no good saving money regularly when you have credit card debt that's weighing you down.
What are the cons of pay yourself first? ›
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.
What does Robert Kiyosaki mean by pay yourself first? ›
The goal is to pay yourself first and always to have money to invest. Once you have money for investments, you should learn about assets worth investing in so that your money grows faster than the inflation rate. As always, we suggest you conduct due diligence before investing your hard-earned money.
What are the three basic reasons to save money? ›
There are three basic reasons to save money. First, we save for an emergency fund. Second, we save for purchases. Third, we save for wealth building.
How should you pay yourself? ›
To pay yourself a salary, you need to set up an employment agreement with the corporation and become an employee. You'll receive regular paychecks like any other employee, and taxes will be withheld from your salary. Alternatively, you can receive dividends if the corporation generates profits.
You can't spend the cash that's out of sight, the logic goes, or miss the money you never “had” in the first place. “Pay yourself first” was first coined in the 1920s by George Samuel Clason, an American entrepreneur who founded a successful publishing business in Denver, Colorado.
What is pay yourself 10 percent? ›
That means before paying any bills, you designate the first 10 percent of your earnings towards investing in yourself. This can include putting money into a savings account, retirement account, creating an emergency fund, or paying off existing debt.
Why is paying yourself first good? ›
The advantage of "paying yourself first" out of your paycheck is that you build up a nest egg to secure your future, and create a cushion for financial emergencies such as your car breaking down or unexpected medical expenses. Without savings, many people report experiencing a large amount of stress.
Which is the best example of paying yourself first? ›
Putting your money into savings, retirement or investments before paying your bills and spending could help you stop living paycheck to paycheck and finally save toward financial goals. Automated retirement contributions and savings transfers can help.
How many percent should you pay yourself? ›
What Percentage Of Your Income Should You Pay Yourself First? As a business owner, determining how much of your income to set aside can be a bit more complex than if you were an employee. However, 10%-15% of your income is generally a good rule of thumb.
What is the 50 20 30 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
What does the 60/20/10-10 rule represent? ›
Put 60% of your income towards your needs (including debts), 20% towards your wants, and 20% towards your savings. Once you've been able to pay down your debt, consider revising your budget to put that extra 10% towards savings.
What is the reason for putting yourself on a budget? ›
A budget helps you make sure you will have enough money every month. Without a budget, you might run out of money before your next paycheck. A budget shows you: how much money you make.
Should you pay your debt first? ›
Prioritizing debt repayment before saving is a prudent financial strategy that can lay the groundwork for long-term financial stability. This approach acknowledges the urgency of addressing existing debts, particularly high-interest ones, as they can be a substantial drain on your financial resources.
