Pay Yourself First: How to “Stack the Deck” and Increase Your Savings

I used to be broke and live paycheck to paycheck. On Friday I'd get paid, and within two weeks I’d be down to my last few dollars in my bank account. That worked fine, until I lost my job and the paychecks stopped coming. I was totally unprepared. No emergency fund to speak of, no job prospects, no nothing. 

Those were hard times…very hard. Eventually I found a job and got back on my feet, and along the way I learned a powerful lesson on the importance of being intentional about my finances. That meant creating a budget, building an emergency fund, and learning how to pay myself first.   

So what does it mean to pay yourself first?

If you’re like I was, you probably spend your paycheck throughout the month and move what’s left into savings before the next payday. Nine times of out ten, this is $0.

That's because you’re putting your own savings last, and your paycheck is long gone by the time you’ve paid your bills and had some fun.

And then the cycle repeats again every payday.

Why not just flip the script?

Instead of waiting until the end to of the week to see how much you have left, why not pay yourself first? Sure, you’ll need to adjust your spending, but I can’t think of a more positive forcing mechanism then investing in yourself.  

If this sounds easy, it’s because it is. It just requires a mental shift and some quick automation which I’ll show you exactly how to do.

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Step 1.  Determine how much to pay yourself

First, you’ll need to estimate how much you can realistically cut from your budget, which will become your savings rate. You may be thinking, “If I could figure that out, wouldn’t I already have money left over every pay period?” Well, not necessarily.   

Money has a weird way of finding something to buy, whether you want it to or not. And that’s why paying yourself first works so well. You’re making an intentional decision upfront, so you don’t have to worry about your money magically disappearing over course of the month.  

My favorite tool for determining what you can afford to pay yourself is a zero-dollar budget. It helps you map out all your other purchases, debt payments, and other critical bills in advance, so you can be confident you will have the money you need.  

Step 2.  Figure out what you should do with the money

Once you know how much you can afford monthly, it’s time to figure out what to do with it. I personally determine where to contribute money for savings and investment in a consistent prioritized order, that looks like this: 

  1. Establish a resiliency fund
  2.  Make additional principal payments on high-interest debt
  3. Create an emergency fund
  4.  Increase your retirement contributions to 15-20%
  5.  Establish a non-retirement investment account

Any of these are good options, so feel free to prioritize differently if it helps you reinforce the behavior.

Step 3.  Automate! Automate! Automate!

Now that you’ve figured out how much money you can pay yourself and how you want to spend it, you need to decide where it should go. Depending on how you intend to use it, you may have different accounts you want it to go to. That’s totally fine.

The important part is to get the money out of your primary checking account and into the other account(s) of your choice (e.g., savings account, retirement account, investment account). 

Automate the process by creating a recurring transfer, scheduled to occur once or twice a month. This is a standard, free service offered by virtually all banks, so if yours doesn’t offer it, find one that does.

I would recommend scheduling your transfers for the day after payday, so you get accustomed to not seeing the money in your checking account. If you let it hang around, it will find somewhere else to go.

Step 4.  Monitor and Adjust

Once the transfers are setup, you should put it on autopilot. Make sure you are thinking through your budget every month and adjusting the transfer amount as needed. Try not to mess with it too much, since the goal here is to automate the process. 

A word of warning about transferring money 

Things happen, so sometimes you’ll need to transfer some money back because you didn’t budget perfectly. This isn’t a big deal if you’re doing it once or twice a month, but most banks have a monthly limit on how many times you can transfer money from a savings account back to a checking account.

This is a Federal Reserve regulation (Reg D) that ensures there are enough funds being kept in the bank’s reserves at all times. Typically, the limit is around 6 transfers per statement. If you violate this, you may get fined a penalty or even have your account closed. Wallet Hacks has a great post explaining in detail how the regulation works.

Not so fun fact...this happened to me back when I was living paycheck to paycheck and had a savings account closed...twice.  Lesson learned.

Step 5.  Stick with it

You’re going to have setbacks. Don’t give up. Always keep in mind what's motivating you to do this.

Personal finance is a long game requiring patience and perseverance. The awesome thing is that once you find these strengths in yourself, you’ll reap the benefits for a lifetime.

And then you can start focusing on tweaking another behavior. And then another. Soon these new habits will all stack up and you’ll be well on your way to financial freedom!

Do you pay yourself first? What do you do with the money? Leave a comment below!

It's time to take care of your future and learn to pay yourself first.  This guide will teach you how to get started and automate the process so you stick with it! #payyourselffirst #financialfreedom #investinyourself

About the Author

Hello, I'm Ryan. Besides writing about personal finance my other passions include spending as much time as I can with my amazing family, running around my neighborhood, and continuing to refine my skills as a product manager. You can also follow me on twitter @TMPF_Ryan.

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