Bumper stickers are an interesting way to convey an idea. They aren’t very big, so the message must be small. They tend to be ignored, so the message must be clever. You can’t ask the person driving the car what they mean, so they must be clear in any context.
On the other hand, a lot of the information is lost when a message is conveyed as a bumper sticker. Entire political debates boiled down to a certain sounding phrase are one example. In the financial world, bumper sticker financial advice often comes from books where repackaging existing financial ideas in new sounding ways is the fastest way to personal finance stardom.
Pay Yourself First What Does It Mean?
One of the most ubiquitous financial planning as a simple phrase is, “Pay yourself first.”
What pay yourself first means, literally, is that you should set aside money to be saved or invested before spending money on anything else.
The concept works like this. If each week (or month, or whatever) you get a paycheck if you pay yourself first, then you won’t spend too much money and you’ll save for your future. Sounds good, and it is.
In practice, this is nothing more than making a budget with savings goal in it, and then sticking to the budget.
Aye, there’s the rub, as they say.
Sticking to a budget and not overspending can be difficult sometimes. That’s where the paying yourself first idea comes from. If you’ve already saved the money, the thinking goes, then there is no need to make, or stick to, a budget.
What matters then, is how and where you save that money that you pay yourself first. The single best example of this concept is your 401k plan. By saving money in your 401k, you are not only paying yourself first, you are paying yourself before you even get your money. The funds come out before you get your check. It’s saved before you can spend it. As an added bonus, it is difficult to get your money back out of your 401k plan without jumping through a lot of hoops.
Actually, anything with automatic payment or investment works this way. A person with a 529 plan that automatically takes $100 per month on the 1st of every month (or whenever you get paid) will inevitably have more money than one where the person has to put the money in manually. Sooner or later, a contribution will be forgotten. Then, of course there will be that month where there are some extra expenses so we’ll skip it that month (to be made up later, of course), and so on.
Paying yourself first is a solid strategy, but it isn’t anything new. If you stick to a budget, you’ll get nothing extra out of paying yourself first. But, if you’re one of those people who budgets by watching how much money is left in your checking account, paying yourself first, could be just the ticket to better financial responsibility.