November 3, 2021
"Pay Yourself First" is a type of budgeting where you automatically deduct essential payments and savings from your paycheck before it even hits your checking account.
The first step is taking out a consistent percentage of every paycheck to contribute to your workplace 401k/403b or IRA. Next, an automatic payment is made for your mortgage, vehicle, and any other mandatory monthly spending.
Part of what is left then goes directly to your savings account where it is portioned off to your emergency savings and other short-term savings goals – like a new car, home, vacation, or any other specific goal. Additionally, you could allocate a portion of your remaining paycheck to be automatically contributed to an individual brokerage account to help save for medium- and long-term goals.
Whatever remains from your paycheck is then deposited into your checking account to be used for more discretionary spending. Because you have already paid all necessary bills and contributed to your savings and retirement, you have a good grasp on exactly how much you can reasonably spend throughout the month and are less likely to go overboard and miss out on contributing to one of your important accounts. Your future self will thank you.
This includes your mortgage, groceries, student loan payments, car payments, medical expenses, credit card debt and similar expenditures that are truly necessary for your wellbeing.
This includes eating out at restaurants, buying new clothes, vacations, etc. Anything that you really don’t need to get by. These are expenses that you pay for once you have already contributed to retirement, savings, and all of your mandatory spending.
It should be noted that this plan is not necessarily universally appropriate for every situation. For instance, if you have a lot of high interest credit card debt it may be more beneficial to pay that off before you build up your emergency fund or other savings or investment accounts.
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