Should You Pay Yourself First?

This method for saving money works for a lot of families. It may work for yours.

By Gary Foreman


Some people try a strategy for saving where they "pay themselves" at the beginning of the month, rather than saving whatever is left at the end. Many folks find that by waiting until the end, nothing is left for the savings account.

How Paying Yourself Works
Many families will continue spending until all the money is gone. No matter how much money comes in, some bill or new purchase will claim it. Raises and bonuses all seem to vanish without a trace.

Paying yourself first turns this problem into an advantage. If you take 1 percent of your income and put it in a savings account at the beginning of the month, the amount of money available for spending is less.

Some people like this plan. They have a little less in their pockets and so they spend a little less. Gradually they begin to accumulate savings.

How This May Not Work for You
Paying yourself first is not magical. The electric bill will still arrive and you will still need to buy groceries.

A certain amount of self-disciple is required to benefit from the plan. You need to resist that impulse buy, even if it's just a daily candy bar.

Paying yourself too much can be another problem. You need enough money to pay for monthly expenses. If you cannot meet them, consider making some adjustments to your basic expenses (forgoing a gym membership or selling the second car, for example).

Unexpected expenses can also sink this plan. These are those home and auto repairs that inevitably crop up.

Your budget needs to cover this type of expense. Put some money away each month for these "big hit" expenses. If your car is getting old, protect yourself by putting $100 away each month. You'll need it for that "unexpected" $1,000 repair bill.

Where to Save
Where you put your savings is important, too. It's wise to have two savings accounts: one that's readily available for those big hit expenses and another for long-term savings.

Don't use the money in the first account for a fishing boat or a new spring outfit! It's for unavoidable repairs and expenses.

The long-term savings account should be less accessible. Use it only for a true emergency. Otherwise, it should be for long-term goals like a college education or retirement.

How to Start
Starting a pay-yourself-first program is always easiest when you get a pay raise. Take the increase and put it in your savings account. This way, you will still have the same amount of money available as you did last week.

Don't let the lack of a pay raise keep you from starting. You can begin with $5 this month. Most of us spend that much impulsively sometime during the month. Increase the amount when you can. After a while, it will accumulate very nicely.

Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher Web site