It simply means that each time you receive money from a regular source (for example, a paycheck or an allowance) or unexpectedly (for instance, gifts or a tax refund), you save part of it. Over time, that money accumulates and helps you meet your financial goals, big and small. This publication explains the pay-yourself-first concept in more detail and discusses ways to get started.
Pay-Yourself-First is a simple concept that paves the way for wealth accumulation or an upcoming need you may have. It simply means that each time you receive money from a regular source (for example, a paycheck or an allowance) or unexpectedly (for instance, gifts or a tax refund), you save part of it. Over time, the saved money will grow and be available for emergencies or for long-term goals (for instance, buying a car or house, paying for college, taking a vacation, retiring, or purchasing expensive items such as electronic equipment). People who are financially secure set aside money for their goals or future needs consistently but may not use the term "pay-yourself-first" to describe the process. Many personal finance books list this as a strategy for becoming financially secure or wealthy.1
How much should you pay yourself each payday or allowance period? That depends on your goals and varies from person to person. The amount saved should be realistic for your income. Being consistent in your savings habit will be a key to your success, and is more important than the amount you save. Over time, you will make more progress by saving the same amount consistently than you would if you saved whenever you thought about it.
Effortless Ways to Pay-Yourself-First
After some initial action on your part, these suggestions will only require review once or twice a year.
- If you receive a paycheck and your employer offers direct deposit, use it. Direct deposit means that your employer sends your earnings directly to your bank. On a monthly basis, have your bank draft a predetermined amount of money from your checking account to your pay-yourself-first account. Money for this account can be deposited into a bank savings account, money market account, or a mutual fund. Explore your options with a bank representative, certified financial planner, or someone you trust who understands money matters.
- If you receive your income in cash or a check, head for the bank the moment you get it! Make a deposit in your pay-yourself-first account before you spend any of the money.
- As your income increases, put the increases in your pay-yourself-first account. For instance, if you get a $20 raise in your monthly income, put the extra $20 into your pay-yourself-first account.
The old cliches "you don't miss what you never had" or "out of sight, out of mind" apply to paying-yourself-first. If money is not available, you won't spend it.
Especially for Parents
You can instill the pay-yourself-first concept in your children in several ways.
- First, model the behavior for them. Children are more likely to do what you do than to do what you say. If children see and hear you talking repeatedly about saving money each payday during their years under your care and leadership, they are more likely to do the same when they become adults and leave home. Think for a moment about young adults and their parents. How many of the behaviors of those young adults are similar to their parents' behavior? Of course, if you examine your own family carefully, patterns may be evident. However, it is usually easier to see patterns in someone else's behavior.
- If you give your children an allowance, insist that a portion of the allowance be designated for long-term savings or their pay-yourself-first account. The younger the children are when you start teaching this concept, the easier it will be for them to accept and practice it later in life. When children are very young, the 3S method--save some, spend some, and share some--is often used by parents to help children understand the concept of pay-yourself-first.
Especially for Naysayers
If you are thinking "But I don't have any money to pay-myself-first," stop thinking such negative thoughts. Instead ask yourself, "What can I give up or change in my present habits to increase my savings?" Starting small and being consistent will be more beneficial over time.
Example 1 illustrates the power of consistency over 1, 5, and 10 years. The figures below do not include the impact of compounding interest. If compounding interest were included in Example 1, the amounts would be larger. The higher the amount of interest earned on money saved, the higher the amount accumulated.
|Amount saved monthly||1 year||5 years||10 years|
Many calculators are available on the World Wide Web to help you estimate the dollar amount accumulated for predetermined periods.
Boston, Kelvin E. 1997. Smart Money Moves for African Americans. G.P. Putnam's Sons. New York.
Quinn, Jane B. 1997. Making the Most of Your Money. Simon and Schuster. New York.
Stanley, Thomas J. and William D. Danko. 2000. The Millionaire Next Door: The Surprising Secrets of America's Wealthy. Longstreet Press. Atlanta, Ga.
a. Cost of one meal at a fast-food restaurant, one video rental, or 12-can pack of soda on sale.
b. One pizza delivered, or a matinee movie with popcorn.
Prepared by Cathy F. Bowen, associate professor of agricultural and extension education, and Sarah Siegel, extension agent, Clarion county.