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?


  1. I don’t automate saving because I find that my expenses can be somewhat variable. Every payday, I write down all of my upcoming expenses for the next 15 days, and figure out exactly how much I can put into savings. I leave a $200-250 buffer in my checking account in case anything comes up.

    Surprisingly, I’ve been saving MORE than I would have saved if I had chosen to automate my savings. I’m in the process of saving for a house – I was planning on saving up $500/month and it’s actually been more like $700/month.

  2. We also pay ourselves first. More so now than ever. We have put the maximum we can in the 401k which sadly lost a lot of money recently. 🙁 But we also have a savings account which we’ve been keeping my husband’s bonuses in for a few years. We just pretend we didnt’ get them. Now our combined funds are big enough that we are seriously contemplating buying a piece of land with a little mobile home on it. We’d live in that while hopefully getting ready either to put a larger one on the land or build a house on it. Looking in to all the details right now and preparing to make an offer. I think in our case it helped that we’ve been through a huge financial crisis related to a job loss several years ago and since then have taken saving and avoiding credit and mortgages far more seriously.

  3. We pay ourselves first ALL the time, last some of the time, and occasionally in the middle!
    In my experience, having some parts automated and some parts manual seems to work best, but paying yourself first is one sure way to tilt the odds in your favor.

  4. Good advice as usual FrugalDad.

    We pay ourselves last, I’m afraid. As my wife’s income is variable and we spend almost all of mine on the current state of affairs (along with debt servicing) we have to wait until the end of the month and see how much we had left. Then we chuck that into the savings account or pay down debt with it. I just paid off another credit card as of yesterday! Yay. One card left to go and then the car and student loan.

    As FD warned about, make sure to have enough money to cover yourself with those automatic drafts. I have several auto-draft items and was bitten about a year and a half ago by them. I made a car payment and it was taken out on the day I entered the payment rather than the scheduled date that I set when entering the payment (web site pay portal). I had the printout to prove what I had entered, but they said their system was correct. I was charged overdraft fees for the car payment and FOUR other payments that were supposed to be covered by the money taken by the mistakenly early car payment. Thank goodness the bank saw reason in that I hadn’t overdrafted my account for over 3 years and reversed the charges. When scheduling payments and automatic drafts, always pay attention and make sure to check your online bank register at least once a week.

    By the way, FrugalDad, did you end up taking the savings and use it to almost pay off that loan? How much debt do you have left? Just curious.

  5. We pay ourselves first, haven’t really paid ourselves last, that I’m aware of.

    We do the Zero-sum budget, trying to save every penny, but we had been running short on our cash (envelope system) so there rarely was anything left over after a new paycheck.

    Of course we’re trying to build a big emergency fund before socking a lot into 401k or children’s accounts.

  6. @DavidK: No, I decided to stretch those remaining payments for another couple months to keep a healthy cash reserve. If everyone was healthy, I might have pulled the trigger and moved some of that savings over to pay off the loan. I just didn’t feel good about it, and that voice in the back of my head is usually right (when I listen to him!).

    I’ve paid off nearly 15k since March of this year, and built a little savings in that same time. I’m more than half way home!

  7. Very good advice and something that hubby and I have tried to do consistently during our 17 years of marriage. And we’ve been glad that we have too. 2 years ago hubby was on strike for 3 mos. w/out income. Fortunately we live within our means enough that we only needed to use $1000 from our savings account to tide us over (we lived on my paycheck). Now that we’re back on track we realize more than ever how important it is that we pay ourselves first (savings, 401k, ING and 529’s for our girls). Our oldest daughter now has part-time income from an after school job and baby-sitting. We’re teaching her just how very important it is that she do this as well. She puts 50% of all her earnings in her savings account.

  8. Since I currently handle most of our finances, I also pay myself first and last. Another trick I use to transfer money into our “temporary” savings account (a holding account before I transfer to an online savings account) a few times a week, $20 here, or $30 there. That way, I don’t miss the money but if I’m burning for cash towards the end of the week I can “lend” myself some until the next paycheck. So far, I’ve increased my savings rate by about 33% using this method. I just ignore the amount growing in the temporary savings account and focus on what remains in my checking. At the end of the month, I transfer the savings into an on-line account and never see it again!

  9. It’s all mine at this point, so I try to just do it the easiest way possible. Every third check goes directly to savings in it’s entirity. I get paid twice a month.

    If I find the cash in my everyday checking account is building up, then an additional paycheck goes into savings until I need to put $$ into the everyday account. Or basically, if there is plenty in the everyday account to last for 2 weeks, then the paycheck goes directly into savings.

  10. I did the “Pay myself first, and last” thing when I was getting out of debt and first getting into saving money.

    Honestly, the “pay myself last” part drove me nuts. It was a dark cloud which hung over each and every purchase, because I had to weigh whether I wanted something bad enough versus having the savings. In the end I saved only about $1,000 extra this way all of last year (2007), but it was too much stress. Hell, I probably spent more than I saved trying to cure the stress which it caused.

    I abandoned that, and now, I “pay myself first” only. I completely compartmentalize money between saving & spending. As long as I can guarantee I’m paying myself (saving) enough first, it means the rest of the money is mine to play with, guilt-free. More automatic, simpler, and much more stress free.

  11. That’s a good way to put it FrugalBachelor. I would guess many people have the same problem with “paying themselves last”. You just never get around to actually paying yourself. 🙂 Taking that into account, for most it is best to “pay themselves first” and make the mental compartments to have savings and then spend the rest. That’s why the 401K contributions work so well — they are just taken right off the top without you ever seeing them. If people make it automatic to contribute X dollars to the savings account, then it never becomes an issue to stress about.

    @FrugalDad, since you’re more than halfway done, then that means you’ll basically be mostly debt-free by the end of next spring. Way to go! Will you be making huge mortgage payments after that or will it all go into the 401K and Roth?

  12. Hey FrugalDad! Love your site. I’ve been hooked on it for the past few weeks (found it through Simple Mom).

    Saving for the reason of purely saving is a tough one for us, for the reasons you said — there are so many things that our money goes toward each month! It’s hard to squirrel money away each month when you know it’s going to be tight. I do like the idea of “paying yourself first” however, and I really would like to implement this in our finances.

    Thanks to your advice, we have set up our first account with ING Direct and we are looking forward to having a high-yield savings account for purely saving. Their automatic transfer plan is great — not having to think or worry about saving sounds pretty awesome!

  13. Frugal dad always has great advice! Because my income varies from month to month and I am self employeed, I’ve had to find unique ways to save. When paying cash I never use change. Therefore, I always have pocket change which goes into a piggy bank. That bank provides extra cash for making ends meet. I also save 10% of each client check I receive during the month. I’ve never had an employer, so matching funds and employee saving programs have never been a part of my life. My saving plans are DIY! Thanks Frugal Dad. YOU ROCK!

  14. We have always made an effort to pay ourselves first–tricky, as we both work freelance. Over the years, this hasn’t added up to the college tuition for our kids or the retirement fund we’d hoped for, BUT it has enabled us to pay all our “emergency” expenses–root canals, furnace breakdowns, new (used)cars, a new roof–as well as two advanced degrees, without having to borrow. My advice is put a healthy chunk of any money you are paid in the savings account first thing, THEN draw from that as necessity dictates. I’ve learned that if there’s one thing you can expect in this life, it’s the unexpected.

  15. I prefer to deduct amount from my pay cheque. As deeper I’m getting into saving habits it’s more obvious becoming to me that it’s all about discipline. Now if you really have problems with holding you self from that saving account, you have to come up with type of account that is very difficult pull money out of at least until you will acquire saving habit and it will become part of your character.
    “Thoughts create action,
    actions create habits,
    habits create character,
    character creates your destiny”

  16. I was sick of living paycheck to paycheck. My money was all gone and I had nothing real to show for it. I discovered the concept of “Pay Yourself First”. This is a powerful, new way of thinking that starts you on the path to personal wealth.

    I started treating myself like an employee. I would save 10% right of the bat. The rest of my paycheck would still disappear, but at the end of the month I had that 10%. Over time, it grows and grows.

  17. Another way to pay yourself is to save all of you change. Switch to cash. Only use 20 dollar bills to buy anything. Once a 20 is broken, all of the change goes into the bank. This trains your mind to think that only 20s can be spent. You will end up saving everything that is not a 20.

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