What is Pay Yourself First?

Pay yourself first is a phrase referring to the idea that investors should routinely and automatically put money into savings before spending on anything else.

How Does Pay Yourself First Work?

For example, let's assume you bring home $60,000 a year after taxes. In the pay-yourself-model, saving comes first, not last. That is, you might set up an automatic deduction of $750 from every paycheck that goes into a savings account. What's left is what you have to pay your bills, your rent and all your other expenses.

Why Does Pay Yourself First Matter?

The pay-yourself-first model ensures that you make routine savings contributions. Many people pay themselves last, meaning that they receive their paychecks, pay their bills and other discretionary expenses, and save whatever scraps are left (which usually is far less than what they would save if they had paid themselves first). By paying yourself first, you may not have much left at the end of the month, but that's because you have a fat nest egg.