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What is meant by 'Pay Yourself First'? Does it mean paying the monthly contribution towards a debt(mortgage)? Or, does it mean paying a fixed monthly amount towards an investment?

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Paying yourself first is a method to ensure you are meeting your financial goals whatever they may be. It's also an easy way to automate the process of sending money where you need it go without needing to think about it.

Your goals could be to buy a bit of a mutual fund every month, max your IRA, or stash a percentage of each paycheck in a wedding savings account. Maybe you are saving for a house. Knowing you should save and not doing is guilt generating. Paying yourself first means regularly putting money to these goals so you can stop worrying. Any way you figure it, you've still got bills to pay.

Paying yourself first means taking care of these payments right off the top of your paycheck. The money goes where you need it. A good move is to automate this with bill pays, ACH transfers to investments accounts, etc. Once this is done, you can guiltlessly spend the money that is left over knowing that you've taken care of the important things and met all your goals. You never have to find yourself wondering if you paid your cell phone bill or if you have enough money to go out tonight. Savings for the new car you want are, as they say, in the bank.

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Paying yourself first involves getting some part of your income somewhat out of reach, with the intent that you don't spend it during the month. It could be a retirement account, a savings account, or something similar.

It's in contrast to saving whatever is left over at the end of the month: paying yourself last.

The intent is to renormalize spending levels down, effectively living on a smaller income and saving or investing the difference. The lower spending levels will become normal, and it won't feel quite as much like a belt-tightening exercise.

  • Thank you. Up until reading this comment I had assumed "pay yourself first" was just a pointless rebranding of "save money" in the interest of selling books. If only one of the many articles I had read that term in had explained it better I might have realised it was a useful policy, even though I still think it's a bad name. – Eric Nolan Mar 28 at 14:04
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As an advertising slogan, it generally implies saving monthly into an investment account.

If you do pay yourself first, basically making saving/investing part of your budget, the intent is that you won't get to the end of the month with nothing left to save, because you will have already done it.

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The core idea behind this statement is that there is always money for what you prioritize. If you try to use whatever is left over after your bills for savings, you probably won't save very much if anything.

In practice, you decide on a fixed amount of money you will save out of each paycheck and put that aside in an investment or savings account, then pay your bills out of what is left.

Essentially it is a way to counteract the tendency of your lifestyle rising to exactly meet your income and leaving nothing for savings.

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