These three words make up the single most effective piece of financial advice I’ve ever received:

Pay yourself first.

I first came across these words when I read David Bach’s book, The Automatic Millionaire at age 19.

I highly recommend this book

First, I’ll describe how to NOT pay yourself first, which is what a lot of people do:

You bring money in (paycheck) and then you pay money out (mortgage, bills, food, other expenses). If there’s money left over, you then have the option to put money away for your future (pay yourself last).

The problem with this approach is that there’s no guarantee you will have money leftover to pay yourself. What if an unexpected expense comes up or you decide to buy some new sneakers? All of a sudden, you’ve spent your entire paycheck.

You tell yourself, “Oh well, maybe I’ll save next month.”

But it rarely happens because 1) unexpected expenses always arise and 2) you have to rely on willpower, which is never a good way to make sure things happen.

This is why nearly half of American families have no retirement account savings [1].

What does “pay yourself first” mean and how do you do it?

“Pay yourself first” means to save, or put money away for your future self (pay yourself), BEFORE you pay for everything else. This is a way of protecting the money from yourself because it is gone before you have the opportunity to spend it.

You pay yourself first by setting up a recurring automatic contribution into a retirement account such as a 401(k) or IRA from each paycheck. The key is to make it automatic, like David Bach suggests in his book.

You can actually do this with any type of account and I suggest automating your personal emergency savings in addition to your retirement savings. In this article, I’ll show you how to do both.

The reason automating your savings is so effective is that you don’t have to think about it.

If you leave it up to your own willpower to save manually “whenever you can” then you will never do it because it always feels better in the moment to spend the money on something you want than to save it for a rainy day.

Building up savings is a form of delayed gratification, which requires willpower. But the amount of willpower is dramatically reduced when you automate the process.

Here’s how to automate your retirement savings:

Sign up for your workplace retirement account online or through your HR department. Ideally, you should do this immediately when you begin your job, but better late than never.

Then, select how much you would like to contribute in terms of percentage of your paycheck. This is a pre-tax amount, so the more you can contribute, the better. I recommend a minimum of 10%.

If your company matches contributions up to a certain percentage then contribute at least that amount. Otherwise, you’re throwing away free money.

When you get a raise, increase your contribution percentage by a minimum of 1%. You won’t feel the hit because you just received a pay increase, so you can maintain your current lifestyle and still save more.

Continue to do this until you max out your limit. As of this writing, the maximum annual 401(k) contribution is $18,000 which should equate to well over 10% of salary for most people.

I started doing this when I started my first real job out of college and never looked back.

I paid myself 10% of my paycheck in year one. I never “missed” this 10% because I felt like I never had it. Each time I got a pay raise, I increased this percentage by 1% and prioritized paying myself more over upgrading my lifestyle. I did this until I was maxing out my 401(k).

Now, ten years into my career, I’ve accumulated over a quarter million dollars in my retirement savings account. Even if I stop contributing now, there’s still a good chance I’ll have well over $1 million in 20 years.

It’s worth noting that I’m fortunate to have never had any student loan debt and I also have a well-paying job. But more than anything else, I attribute my current level of savings to the fact that I started paying myself first early on and never stopped.


Image by Negative Space.

Here’s how to automate your personal emergency savings:

First, open an online savings account. These are the most convenient options for automated savings. I use CapitalOne 360.

Next, link it to your checking account (where your paycheck gets deposited).

Finally, Set up a recurring transfer between your checking account and your new online savings account.

I suggest syncing the timing of the transfer with your paycheck. So if you get paid biweekly, set up the transfer biweekly. This way, it just feels like you got a little less in your paycheck. You’ll adjust to this lower amount quickly.

The faster you want to grow your emergency savings, the larger your recurring transfer should be. You can always edit the recurring transfer and change the amount with a couple of clicks.

That’s it. Now, just let your savings account grow on autopilot.

You only have one job: Don’t withdraw money from the account unless it’s a real emergency.

If you deposit $100 biweekly and don’t touch it, you’ll have $2,600 and change (interest) by the end of year 1. By the end of year 5, even if you have to withdraw a couple thousand for emergencies, you’ll still have over $10,000 in savings.

This will not be the case if you decide to withdraw money to buy shoes or go on vacation every couple of months. Set up a separate fund for shoes and vacations. With CapitalOne 360, I can set up as many savings accounts as I want.

Remember: no matter what happens, always pay yourself first.

This simple piece of financial advice, these three words, truly changed my life.


[1] Here’s how much the average American family has saved for retirement

Featured image by Michal Jarmoluk.

First published on Quora (1, 2).

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