Pay Yourself First: What It Means and How to Do It | Capital One (2024)

FAQs

Pay Yourself First: What It Means and How to Do It | Capital One? ›

Key takeaways

"Pay yourself first" is a personal finance strategy of increased and consistent savings and investment while also promoting frugality. The goal is to make sure that enough income is first saved or invested before monthly expenses or discretionary purchases are made.

One way to pay yourself first is to set up a split deposit, which is when a part of your paycheck goes into a savings account and the rest goes into a checking account.

Pay yourself first is a strategy for maximizing savings over time by setting aside a portion of your monthly income in savings before you do anything else with the money, whether it's paying your mortgage, buying groceries, or signing up for yet another streaming subscription.

The pay yourself first budgeting method can help you grow your emergency fund to have a financial cushion for unexpected expenses. It helps you make steady progress toward your savings goals. Saving for a short- or long-term goal can be challenging if you have to remember to set money aside every time you are paid.

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.

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.

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.

Savings First, Bills Later

When you use the pay-yourself-first model, the order of these steps is flipped. Here's how it works. On every payday, start by taking out money for savings and put it directly into your savings or investing account.

How do you prioritize yourself first? ›

Do not subtract other amounts that may be withheld or automatically deducted, like health insurance or retirement contributions. Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.

According to Priti Rathi Gupta, Founder of LXME, as a salaried woman, you can follow the 50:30:20 Rule, which is the golden rule of budgeting. It is a great idea to start with which allocates 50% of your income to needs, 30% to wants, and 20% to savings and investments.

Spend money to take care of yourself

It's ok to spend money on exercise, healthy food, and to support your mental health. Taking good care of yourself will make you stronger in your relationships, your work, your confidence and your energy.

Explanation: 'Pay yourself first' means to auto-deposit a set amount of money into savings after each paycheck so that you don't spend all your income. It is a strategy that encourages prioritizing saving for the future over immediate spending.

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.

“Paying yourself” means that you prioritise your expenses such as: Your financial goals – from higher education to retirement. An emergency fund.

Likewise, if you're an owner of a sole proprietorship, you're considered self-employed so you wouldn't be paid a salary but instead take an owner's draw. Single-member LLC owners are also considered sole proprietors for tax purposes, so they would take a draw.