Career & Finance Fridays

Do not save what is left after spending, but spend what is left after saving.

One of the key principles of personal finance is to "pay yourself first."

This doesn't only apply to people who are self-employed. Even if you are traditionally employed, you should plan to pay yourself first because this advice isn't actually about getting a paycheck.

Pay yourself first is a money-saving technique that focuses on saving for your long-term needs and well-being ahead of any other spending.

Learn how this system works and how it can help you save money.

What It Means to Pay Yourself First

"Pay yourself first" means that you should pay your own savings and investment accounts first. You are "paying" your future self by saving for your long-term needs and expenses. For example, paying yourself can include:

• Putting money into your retirement accounts, such as a 401k or Roth IRA
• Buying insurance, including life insurance and long-term disability care
• Paying into a health savings account
• Creating an emergency fund
• Paying off debts

When you pay yourself first, you are prioritizing your long-term financial well-being. Rather than focusing only on immediate needs, such as bills or entertainment, you pay your future self by saving before you do any other spending.

Why Is It Important to Save First?

Your expenses break down into two categories:

• Mandatory expenses: Bills that must be paid, such as rent and electricity; things that you need to live healthily, such as food or medicine; and things that you need to do your work, such as a uniform or internet connection.
• Discretionary expenses: Variable costs that aren't mandatory, such as entertainment, clothing, travel, home decor, new electronics, eating out, TV streaming accounts, or gym memberships.

When you only save what is left at the end of the month, you are putting savings in the second category: it is a discretionary expense that varies every time. Sometimes, depending on your other spending, it might not happen at all. If you think about your savings only after everything else is paid for, then it's easy to end up with nothing left over to save.

If you pay into your savings and long-term planning accounts first, however, saving becomes a mandatory expense. You are treating saving like any other bill that must be paid, no matter what. And by paying it first, you are deciding that your long-term financial well-being is the most important "bill" you pay.

Why This Approach Works

This approach increases the likelihood that you'll save a substantial amount. It converts saving money from a desire into a necessity. Only after you have paid your mandatory expenses, including your long-term saving and insurance, will you know how much you have available for discretionary spending.

The order is important for another reason: it may be harder to cut things like TV streaming or a gym membership in order to put $400 in your retirement account every month.

But it's a lot easier to eliminate TV streaming and gym memberships in order to pay your rent. By saving before you pay your bills, you put your other mandatory expenses at risk. This makes it more likely that you will eliminate discretionary expenses in order to keep saving.

How to Start Paying Yourself First

It can be daunting to start paying yourself first when you already feel like you struggle to keep up with your bills and other spending. However, if you break down your goals into manageable steps, it will be easier to start saving.

There are a variety of ways to do this.

Automate Your Savings

The money you get in a paycheck doesn't have to all go to the same place. If you make enough money, but have trouble saving, automate it by sending your paycheck to different accounts.

You can have a certain amount of your take-home pay deposited into your:

• Retirement accounts
• HSA
• Savings accounts

The money will never appear in your checking account and you won't have to worry about spending it.

You can also set up these transfers from your checking account; just make sure you set them for the day after you are paid so that you don't have the opportunity to spend your savings on other things.

Pay Off Debt First

If you have high-interest debt, such as personal loans or credit card debt, focus on paying that off first. Otherwise, the interest payments will continue to eat into your ability to save.

Using either the avalanche or snowball method, designate a certain amount of each paycheck that you will put toward paying off debt. Make this payment immediately every time you are paid; that way, you won't risk spending your debt payment on other things.

Once you have eliminated your debt, take the money that you were putting towards payments, and start putting it into savings and retirement accounts.

Pay in Advance

When you buy life insurance or disability insurance, you can make monthly payments, or you can pay for the entire year's amount at once. If you want to pay yourself first, making annual payments can help.

Some insurance companies will offer you a discount if you pay annually rather than monthly.

This will mean that a larger amount of money goes out in a single payment. However, you then won't have to keep up with monthly billing.

Start Small

Paying yourself first doesn't have to mean suddenly opening dozens of savings accounts and buying multiple insurance plans. If you haven't done any saving yet, you need to start small.

You can start building an emergency savings account $10 at a time. As long as that $10 is going out first, before any other bills, you will start to make progress.

To increase your savings, you may have to find ways to get a second job, take on part-time work and find ways to decrease your spending.

Even if you don't have employer-sponsored retirement accounts, you can still open up an IRA through a brokerage or a bank. Many of these accounts may have minimum initial deposits. To save that amount more quickly, you can put your savings in a high-yield savings account where it will earn interest.

As long as you make these payments and transfers before you spend money on any other expense, you are starting to pay yourself first.

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