Pay Yourself First, and Last

Ever heard that old saying, “pay yourself first?” Who hasn’t?  It is another one of those financial axioms that is much easier said than done.  When we first get paid the last thing most of us think of is saving money.  After all, there are so many other pressing needs.  Car payments, mortgages, credit card bills, and the biweekly celebration at Outback Steakhouse are all vying for our dollars.  But what if we could get just as fired up about saving money as we do spending it?  Even better, what if you could make savings a priority both at the beginning of the month, and the end?

Pay Yourself First

Under the “Pay Yourself First” plan you create some easy ways to divert money from your primary spending account to various forms of savings.  When savings are taken right off the top of your paycheck you’ll be less likely to miss the money, and less likely to spend it if it hits your checking account.  Not everything can be automated these days, but fortunately most banks and brokerages allow automated transfers with a customizable schedule that meets your needs.  Here are a few examples of ways we are paying ourselves first:

  • 401(k) plan contributions are deducted right off the top of your paycheck.  Currently, these contributions are pre-tax, which means in addition to the benefit of saving money for retirement you get the added benefit of reducing your taxable income for the current tax year.
  • Biweekly contributions to a Roth IRAWe take dollar-cost averaging to the extreme, and instead of contributing only once a month, we divide our yearly contributions by 26 biweekly periods and contribute every two weeks.  Once we hit debt freedom we would like to max out our contributions, but for now we are content with making minimal investments just to kick-start retirement savings (and take advantage of the bargains in today’s market).
  • Biweekly contributions to college savings plans for our kids.  Similar to how we’ve scheduled contributions to our Roth IRA, we make biweekly deposits in our kids 529 college savings plans.  It is all automated, so once things are up and running it requires very little maintenance.

Pay Yourself Last

During the month we make a game out of trying to best our budgets for the various spending categories we have setup.  Things like food and entertainment are areas where we are typically able to come in under budget, and when we do we sweep that money into our emergency fund to continue building it towards our goal of 6-12 months of expenses.  In the past, we have also used this extra money to boost our debt snowball payment.  The idea is to reset that checking account before the next month starts, and to account for any remaining money by putting it to work for us, rather than frittering it away in miscellaneous spending.

In what ways are you paying yourself first?

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