Personal finance folks often throw around the term “pay yourself first.” It is a bit big-headed of us to assume you know how to do that. Here are some steps you can take to put the most popular finance advice to work.
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Plan for Your Future
The first place to make a big difference is saving for your retirement. This is an incredibly important part of your finances and most employers make it very easy to do.
First, take 100% advantage of all employer 401(k) matching. If you get a 100% match on 3% of your pay, put at least 3% of your pay into the 401(k) plan. At my company, I get a 100% match on up to 4% of my 401(k) contributions. I put 6% away automatically each month in my 401(k). This should automatically be deducted from each paycheck and deposited into your 401(k) account.
Next, put money into your Roth IRA. The maximum you can contribute to a Roth IRA each year is $5,000 if you are less than 50 years old and make less than $125,000 per year. I put $192.31 from each paycheck into my Roth automatically using my company’s direct deposit. I get 26 paychecks per year, so $192.31 per paycheck maxes out my Roth.
Beyond that, you can always put more into a 401(k) up to $17,000 per year. The same rules apply for 403(b) plans from non-profit employers.
Save For Emergencies
Next up, save for emergencies. I regularly give you updates on my liberty fund, where I put as much as possible from each paycheck. For most people, it is best to automatically transfer funds from each paycheck to an emergency fund or liberty fund account.
The easiest way to do this is by setting an automatic transfer in your bank account. A great option for this is Capital One 360. Capital One 360 has competitive savings account rates and allows for easy transfers. Ally Bank is another great option. If you sign up for 360 Checking through this link, you get $50 free for getting started.
Put Something Aside For Fun
If you don’t have fun, what’s the point! You should always spend consciously and only put your money into things that you get value from, but if you don’t budget for it, you won’t have the money when you need it.
Fun money is important and should generally come out of your checking account. You could also spend fun money on your credit cards to get sweet travel rewards, but make sure you only spend as much as you can pay off each month in full.
Don’t Forget Your Bills!
When deciding how much to put into each spending category, make sure you budgeted for your bills that you can’t live without. That includes rent/mortgage, utilities, food, phone, internet, car payments, and insurance.
When you pick your home, meals, internet, and phone plans, make sure to shop around and find the best deals. Never spend more than you have to. This will allow for more to go into savings, investments, and fun money accounts.
How do you breakdown your income into savings and spending? Please share in the comments.
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14 thoughts on “How To Pay Yourself First”
We break down what we want to save first then work our way down. I agree with the at least maximize your employer match but have been confused as to why people don’t max out 401k first before adding to ROTH?
Doing something fun is a must but I find that people have to much fun and spending vs what they are paying themself. You have to look at paying yourself as being important. Too often people look at the money as well not important since they can see or spend it.
Maxing out a 401(k) vs. a Roth depends on a handful of circumstances, namely age. For most readers of this site (20s-30s), putting month in a Roth first makes more sense, as it has many, many years to grow tax free. For people close to retirement, putting into a 401(k) first is best, as you are deferring taxes on an investment that will not increase as much.
If you are in the middle, it is up to the investor to decide whether the deferred taxes is worth more (401(k)) or the increase in the value of their investment is worth more (Roth).
Both my wife and I have automatic payments taken from our bank accounts and put into our Roth IRA’s each month. That way I never really notice the money leaving and don’t have to worry about forgetting.
That’s the best way to do it!
I find most people do not understand the concept of paying yourself first. I took it to mean to set up a payroll deduction for savings. It was the most disciplined way to achieve that goal.
I agree. It can be a perplexing idea. By automatically paying yourself for your future, you are one step ahead of most people.
I need to get better at this! I’m always scrambling for $5K for my Roth IRA right before the deadline.
As long as you are paid with direct deposit on a regular schedule, it is easy to make it automatic. It only takes a few minutes to set up.
I love that you addressed this, particularly since I agree that we just assume people know what it means. It took me a while to understand it.
My husband and I pretty much allocate our money in the progression you described. Mostly. He does a great job of saving for retirement and I was doing a fair job when I had a full-time job. Now? Not so much. I need to figure out how to get better about that.
Try building a system that will allow you to save by allocating a percent of your current income. Just like a full time job, but with one more step because you can’t automate as easily.
I have several accounts and have set up automatic transfer between them, so as the money come into my main account, 90% go where I want them to without further work.
– 25% go to joint account with soon-to-be-hubby. That’s the money that is spent on groceries and other things we spend on together.
– 35% go to my housing account, from where mortgage, house repairs, electricity and so on is paid.
– 23% go to savings.
– 7% go to my projects account, which is also kind of short-term saving.
– 0.7% go to my book accounts, as much of what I read is not availiable at libraries, and I’m a student.
The pension saving is done through taxes.
That is a great system. Having so much go where you want automatically puts you far ahead of most people. Congrats on having everything put together so well!
After recent layoffs for both me and my husband we are getting back on track with our retirement savings. Slow but sure.
It is tough to start from scratch, but it is important. You are dedicated to good money management, so I am sure you will make good decisions.
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