Creates a Habit of Saving
- The most powerful part of paying yourself first is its simplicity. When you save a portion of your income before spending, saving becomes a natural habit, not an afterthought. Over time, this builds a consistent foundation for financial growth.
- Think of it as building a muscle. The more you do it, the stronger your saving discipline becomes.
Takes Advantage of Compound Interest
- Saving early means your money has more time to grow. The earlier you start, the more your money earns through compound interest, where your savings generate returns, and those returns generate even more returns.
- For example, if you save $100 a month at an average annual return of 8%, in 30 years, that $36,000 will grow to over $150,000 just from compounding.
Prevents Overspending:
- Paying yourself first forces you to live on what’s left after saving. It creates natural boundaries for your spending, helping you avoid wasteful purchases.
- Instead of wondering where all your money went at the end of the month, you’ll know that a chunk of it is already working for your future.
Reduces Financial Stress
- Knowing you’re saving regularly brings peace of mind. It creates a safety net for emergencies and prepares you for long-term goals like buying a home, starting a business, or retiring comfortably.
- Even small savings add up and reduce the anxiety of being unprepared for life’s surprises.
Builds Wealth Automatically
Many people think building wealth is complicated, but paying yourself first proves it doesn’t have to be. When savings become automatic, wealth grows steadily without requiring constant effort.
How to Pay Yourself First
Decide on the Percentage
- Start with 10% of your income, as recommended in The Richest Man in Babylon. If 10% feels daunting, begin with 5% and increase it gradually. The key is consistency.
- As your income grows, maintain or increase this percentage to align with your financial goals. (25% should be a goal everyone can reach.)
Set Up Automatic Savings
- Automate the process to remove temptation. Most banks and employers allow you to split your paycheck into multiple accounts. Direct a portion of your income to a savings or investment account before it even hits your checking account.
- For example, if you’re paid $2,500 bi-weekly, have $250 automatically transferred to a savings account.
Prioritize Where to Save
- Emergency Fund: Start by building 3–6 months’ worth of living expenses in a high-yield savings account. This prepares you for unexpected costs like medical bills or car repairs.
- Retirement Savings: Contribute to your employer’s 401(k), especially if they offer a match. Also, consider opening an IRA (Traditional or Roth) for long-term growth.
- Investments: After covering emergencies and retirement, invest in index funds, ETFs, or other low-risk vehicles for steady growth.
Make Saving Non-Negotiable
- Treat your savings like a mandatory bill, just as important as rent or utilities. Pay it before you spend on discretionary items like eating out or new clothes.
- If you’re tempted to skip saving one month, remind yourself of your long-term goals: financial independence, a comfortable retirement, or leaving a legacy.
Track and Adjust
- Regularly review your savings to ensure you’re meeting your goals. If you get a raise or bonus, increase your savings rate instead of spending all the extra income.
- Reevaluate your financial priorities annually to ensure you’re saving effectively for both short-term and long-term goals.
Use Tools to Simplify the Process
- Finance apps like Mint, Rocket Money, or YNAB (You Need a Budget) can help you track savings automatically.
- Consider robo-advisors like Wealthfront or Betterment for effortless investing if you’re unsure where to start.
Example in Practice
Imagine earning $3,000 per month and committing to saving 20% of your income:
- Save $600 every month (20% of $3,000).
- Divide your savings:
- $300 to an emergency fund (to cover 3–6 months of living expenses).
- $200 to a 401(k) or IRA for retirement (especially if your employer offers a match).
- $100 to investments like index funds or ETFs for long-term growth.
Here’s how your savings grow over time, assuming an annual return of 10%:
After 1 Decade (10 Years):
- Monthly savings of $600 grow to $138,000.
After 2 Decades (20 Years):
- Monthly savings of $600 grow to $491,000.
After 3 Decades (30 Years):
- Monthly savings of $600 grow to $1,360,000.
After 4 Decades (40 Years):
- Monthly savings of $600 grow to $3,785,000.
By consistently saving 20% of your income and investing it wisely, you’re not just creating a safety net—you’re building life-changing wealth that compounds over time. This simple habit can make the difference between financial stress and financial freedom. Start today, and let time and discipline do the heavy lifting!
Final Thoughts
The principle of “Pay Yourself First” is simple but life-changing. By making savings your top priority, you’re taking the first step toward financial freedom and lasting wealth. Start small, stay consistent, and remember: wealth isn’t built overnight, but every dollar you save brings you closer to a secure and prosperous future.
