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What Does “Pay Yourself First” Mean?

Written by
Alex Huntsberger
Alex Huntsberger is a personal finance writer who covered online lending, credit scores, and employment for OppU. His work has been cited by, Business Insider, and The Motley Fool.
Read time: 5 min
Updated on February 15, 2024
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Do you ever feel like your paycheck is a magician performing a disappearing act? One second you have a nice new chunk of money in your bank account, and the next you’re scrounging under the couch cushions for change to pay your electric bill.

If you’re someone with low income and bad credit, this “disappearing paycheck” act can feel like a cruel joke. Between bills, groceries, and debt payments, it may seem like you can never get ahead.

Unless you decide to pay yourself first. Have you heard that phrase before? It could be the key to stopping your paycheck's disappearing act.

What does “pay yourself first” mean?

Gabe Lumby is a CPA and the Chief Marketing Officer of the popular personal finance website Cash Cow Couple.

“The ‘pay yourself first’ philosophy is a pretty simple concept,” says Lumby. “Whenever you receive income (from a job or business), you pay yourself first by investing/saving a certain percentage right off the top. So if my goal is to save 20% of my income, I take 20% of my net pay each paycheck and invest that in the best way I see fit.”

Lumby says “The reasoning/thinking behind saving/paying yourself is this: if you wait to pay all your bills and all the other odds and ends that go into life, you will never have enough money to save. There is always something that comes up that gets in the way of saving.”

“But, if you automate the savings by paying yourself first each time you get income, then you will have to only spend what is left over. It is amazing how much easier it is to live on a portion of your total income when you don't give yourself the option of spending all of it in the first place,” he says.

“The Richest Man in Babylon”

Justin Goodbread is a Certified Financial Planner and the founder of Heritage Investors.

“I personally subscribe to the pay yourself first method because I believe it adds the most long-term net worth to a client's financial position,” says Goodbread.

“I first read this concept in the old book called The Richest Man in Babylon which is perhaps my most favorite Finance book today still.”

First published in 1926, “The Richest Man in Babylon” is a book of financial advice written by Samuel George Clason. The book presents advice through a series of parables about characters in ancient Babylon.

Instead of “pay yourself first,” the advice is presented as “a part of all you earn is yours to keep.” The book specifically states that a person should keep 10% of everything they earn for themselves.

While many stick to that 10% mark when talking about “pay yourself first,” a person can certainly “pay” themselves more if they can afford it.

The cobbler's kid's shoes are never shod...

The idea behind the pay yourself first method is to set up a budget where 10% of your earnings goes into an investment account or into alternative investments to build long-term net worth.

“The reason why I like the pay yourself first method is because in today's society it seems like our dollars are often stretched too many different ways and if we leave ourselves till last many times we don't take care of ourselves,” says Goodbread.

“There's an old saying that 'the cobbler's kid’s shoes are never shod.' The idea behind this is that many times we get so busy taking care of others that we forget to take care of ourselves. So whenever I meet with a client I often work with him to develop a budget to where the first 10% of their earnings goes into an investment account like a Roth IRA or a 401k.”

He adds, “This is not to say this is the same money which should go to pay down debt. Obviously, debt is a big burden for many Millennials and Gen-Xers but we still must set aside the first 10% to pay ourselves.”

Give yourself options

Robert R. Johnson is a Professor of Finance at Creighton University's Heider College of Business. He says, “Pay yourself first is important because if people don't do so, they will find themselves with too little in savings to sustain themselves in retirement.

“We all have many worthy competing financial goals in life. For instance, purchasing a home, saving for a child's college education, etc. The difference with the retirement savings goal is that if one falls short, one has only two options and neither are attractive—that is, having a lower standard of living or working longer.

“One has options with other goals,” says Johnson. “For instance, one can continue to rent or buy a less expensive home. With college, a child can attend a less expensive school, attend community college, or work during school. One can also take out student loans.

“Options are valuable, and having adequate retirement savings affords an individual options. When faced with retirement and a lack of savings, the only options are to work longer or to accept a lower standard of living in retirement. And, oftentimes the option of working longer isn't available because of health reasons—a person's own health or that of a loved one.

“Too often one thinks about saving what is left over after current spending needs are exhausted. The proper way to look at it is to pay yourself first, and then spend what is left over,” he says.

Create a System

According to Johnson, “Developing systematic behavior is the key” when it comes to paying yourself first.

"People should first have the maximum amount they can put into a tax deferred investment plan done so via payroll deduction,” says Johnson.

“In effect, if you don't see the money you can't spend it. Some people make the mistake of feeling that once they have maxed out their tax-advantaged plan they are done. Individuals should supplement their tax-advantaged plan with additional savings.”

We’ve written before about the importance of creating a budget if you want to save money and pay down debt. Creating systematic behavior through a budget; deciding what expenses are “needs” versus “wants,” is the same kind of discipline that will help you “pay yourself first.”

So if you want to pay yourself first, then our advice is simple: create a budget. Paying yourself first may be easier than you think, but it would require some planning upfront.

Remember: pay yourself first because you earned it!

Article contributors
Justin Goodbread

Justin Goodbread is the founder of Heritage Investors, a wealth management company located in Knoxville, TN. After several years of working in a large wealth management firm, Justin and his business partner ventured out on their own in 2009. He is the Editor-in-Chief at Financially Simple and is a contributing author for many nationally recognized publications.

Robert Johnson

Robert R. Johnson, Ph.D., CFA ®, CAIA ®, CLF ®, is a Professor of Finance at Creighton University's Heider College of Business. Bob is the author of multiple books and scholarly articles. He is co-author of the books Invest With the Fed, Strategic Value Investing, The Tools and Techniques of Investment Planning, and Investment Banking for Dummies. His articles have appeared in The Journal of Finance, Journal of Financial Economics, Financial Analysts Journal, and Journal of Portfolio Management.

Gabe Lumby is an accomplished CPA who owns a successful accounting practice built from scratch. He is also the Chief Marketing Officer for (@CashCowCouple), a popular personal finance website.

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