The magic of paying yourself first

Does it always seem like you get to the end of your month and there is no money left? You think back to the beginning of the month and how you felt so flush when your paycheck hit your account. Now it is all gone (cue tears). What if you prioritized paying yourself first?

For many years I did the same thing. Always telling myself I would be careful this month and save all of the money that was left at the end of the month. Over and over again, I would get to the end of the month and there would be nothing but a few bucks left over.

This described me perfectly! 

One day my dad mentioned an idea he had read about in the book The Richest Man in Babylon and left that book open for me to read.  The concept he shared was that “future you” was important and you should prioritize “future you” by paying them first, rather than giving them the leftovers each month. There just never seemed to be any leftovers! This idea resonated with me and I decided to see if I could include it in my life.

Photo by Alexander Mils on Unsplash

The magic of paying yourself first is actually really simple. I started by looking at my paycheck schedule to figure out how often I get paid (monthly, twice a month, weekly, etc). Then I went to my savings (or investment) account and set up an automatic recurring transfer to happen the day my paycheck arrives (or the day after if you want to be a little cautious or your check date may vary by a day). That way, from the start of the month, I had met my savings goals and was free to spend the rest of the money that was in my account.

Gone was the guilt of going out to eat, knowing that it meant I wouldn’t be able to save any money that month. I wasn’t having to do mental math during the month to figure out how much I would have leftover. Now, I knew that I had already saved for the month, I am facing less guilt and worry during the month about how I was spending my money. 

This method has helped me learn to manage my finances over many lean months. When I get my check, I would pay myself first, pay my regular bills next (rent, utilities, phone, internet, insurance, car, etc) I left myself with the balance of money and I was free to spend it all on my variable spending (groceries, eating out, mani/pedi, gas, coffee, etc) by the time I received my next check.  

Step 1-Analysis

It is simplest if you get paid once per month. In my case, I was paid twice per month for most of my working life. I ended up taking my bills and dividing them into the first ½ of the month and 2nd half of the month’s bills. When I did that, I realized that most of my bills were in the first half of the month. I ended up only setting up a $100 savings payment from my check on the 1st of the month. The rest went to rent, electricity, insurance, and internet. I had about $150 left from this check to spend on variable items (gas/groceries/food etc) for the 2 week period. 

 From my second check on the 15th of the month, I would save about $600 each month. Then I had fixed bills of the gym dues, a monthly donation, and my cell phone payment. This left about $250 from this check to spend on my variable items (gas/groceries/food etc). 

Step 2- Automation

This is a “set it and forget it” kind of system once you go through the process of getting it set up. I get a scheduled (small) raise at work each year in October, so once a year when that happens, I would usually take 30 minutes or so and re-evaluate how much my new check was and adjust the recurring transfers. This method allows you to simply and streamline the work so it just works in the background and doesn’t require you to be manually transferring money around. This frees up your time and energy to focus on the important things in life and gives you some savings to be able to enjoy life. 

Time to relax!

For the first year of using this system, I just was transferring money into my savings account. After it worked for the first year, I made some changes and sent part of my “paying yourself first” savings from my 15th of the month check to my IRA. By the end of the year, I was able to max out my IRA contribution (this was back when you could only contribute $4,000 per year!)

Photo by Kelly Sikkema on Unsplash

As I have learned more about valuing my current self over this journey over the last few years, I am also applying that value to my current self. By consistently saving money each month, I am setting my future self up for success. I have cash savings I can use in an emergency, I have some money set aside if I need to buy a new car. I used this method to send money each month to a targeted savings account called “house fund” that built up enough for a down payment on my house. 

Gone are the days of worrying about how I was going to manage any large bills like car repairs or having to mentally keep track of my money each month trying to save what is left.  This system has resulted in drastically increased savings account balances and retirement contributions and I don’t feel like I am always strapped for money. It has made me more intentional about how I am spending each week. Quite a benefit from paying yourself first!

Future me better remember to send current me a thank you card!