What Does Paying Yourself First Mean How It Works and Goal
"Paying yourself first" is an investor mentality and phrase in personal finance and retirement planning literature. It means automatically routing a specified savings contribution from each paycheck when it is received.
By automatically routing savings contributions from each paycheck to your savings or investment account, you are prioritizing yourself. This means saving or investing before paying monthly living expenses and making discretionary purchases.
The key takeaways are that "paying yourself first" promotes increased and consistent savings and investment, and it encourages frugality. The goal is to ensure that enough income is saved or invested before monthly expenses or discretionary purchases are made. Data from the federal reserve reveals that most Americans do not have sufficient savings for retirement or emergencies.
The "pay yourself first" plan is recommended by many personal finance professionals and retirement planners. It is an effective way to maintain consistent savings contributions and resist the temptation to spend the funds on other expenses. Regular savings contributions are crucial for building a long-term nest egg, leading some financial professionals to consider "pay yourself first" the golden rule of personal finance.
When implementing the "pay yourself first" method, you can choose various savings vehicles based on your financial goals. This includes contributing a certain percentage of your paycheck to retirement accounts like a 401(k) or an IRA. Alternatively, you can put the funds into a cash savings account. The goal is to build a retirement account, create an emergency fund, or save for long-term objectives such as buying a house. Financial advisors also suggest downsizing to reduce bills and free up money for savings.
Despite the benefits of "paying yourself first," a small percentage of Americans actually follow this strategy. According to the Federal Reserve, less than 40% of Americans could not cover a $400 emergency in cash in 2019. The advantage of prioritizing yourself is that you create a financial cushion for emergencies and reduce stress. However, some individuals claim they lack sufficient income to save and fear not being able to cover their bills if they start saving.
It’s important to note that money set aside for retirement, particularly in a Roth IRA, is accessible if needed. Therefore, fear of emergencies should not deter you from benefiting from tax-advantaged retirement savings plans.
