How to Pay Yourself First

How Much Should I Spend vs. Save?

I must admit, my philosophy on spending has been an absolute roller coaster over the past couple of years.

One month I’ll be hesitant to spend a dime, dreaming of how much it’ll grow if I instead squirrel it away into investment accounts. The next, I’ll spend triple my budget on some experience or gadget, with the justification that I should be focusing more on the present.

I couldn’t seem to find a happy balance. It’s no wonder monthly budgeting hasn’t exactly been my strong suit (until now!).

But on the whole, my frugal months more or less net out with my frivolous ones. “Just par for the course,” I thought. Why change?


The motivation to shift my perspective didn’t come all at once. But over time, it was the guilt that did it. I started to feel guilty for both spending and saving! Spend too much and miss out on savings goals. Save too much and miss out on fun experiences. It was lose-lose!

And when it came to bigger things, the guilt and indecision got even worse. Something had to change.

The Spending vs. Saving Solution

The answer came to me while reading Rich Dad Poor Dad by Robert Kiyosaki (which I reviewed here!).

In his book, Kiyosaki brings forth the concept of “paying yourself first.” I doubt Kiyosaki invented the idea, but this is the first I had heard of it.

Paying yourself first is, in other words, reverse budgeting. Instead of spending all month and saving whatever’s leftover, this strategy involves saving first and figuring out your expenses later.

Are you targeting $500 a month to meet your retirement goals? Great—start there! Then make sure the rest of your budget can accommodate. Think of this like you’re paying your future self (saving) before your present self (spending).

Whether the problem is spending too much or too little (both of which I have personally experienced… in the same week), paying yourself first can help cut down on unnecessary spending and alleviate the guilt of not saving enough.

U.S. savings rates over time (Source: U.S. Bureau of Economic Analysis; retrieved from FRED, Federal Reserve Bank of St. Louis;

What does paying yourself first look like in practice? The idea sounds great, but how could I get myself to stick with this new philosophy if I couldn’t even follow a simple budget?

Paying Yourself First in Practice

The “pay yourself first” philosophy only works if you don’t give yourself the option to cheat. For me, this has meant automation.

I automate absolutely everything. Here’s a list of things that I no longer need to concern myself with, as they are all handled automatically:

1. Direct Deposit: I don’t know many people that don’t do this, but linking your bank account to your employer’s payroll means not worrying about loose checks.

2. 401(k) & HSA: Each paycheck, I have a certain amount deducted for 401(k) and HSA contributions. This way, I never see the money enter my bank account, so I never reach the point of not knowing whether to spend or save it!

3. Car Payments: I currently lease a 2019 VW Jetta for $200 a month. These payments are automatically debited directly from my checking account.

4. Credit Cards: Each month, my full credit card balance is automatically paid through my linked bank account.

5. Brokerage Account: This one’s big for me, and something I’ve admittedly only started getting into. As you may have read in my previous posts (My Portfolio & Allure of the Game), I can’t help myself when it comes to playing around (a little) in the stock market. This is prooobably not a great habit. So! What I’ve finally done is set up automatic biweekly deposits into an S&P 500 index fund. I set my savings target for the year, and divide that by 26 to calculate the amount of each deposit.

There you have it! That’s everything I’ve set up to automatically handle my finances. If I had student loans or a mortgage, those would be automated too.

With my savings target for the year already set, I know that whatever is left over in my bank account is for me to spend! By paying myself first, I’ve been able to remove the indecision that was (you may have noticed) becoming a little unhealthy.

The key is setting your savings target first, and letting the rest follow.

Why Does Paying Yourself First Work?

As it turns out, the majority of people in the US don’t have an income problem; they have a spending problem. You would think that, as peoples’ income increases, so too would their savings. And this does happen... to an extent. But the relationship is not nearly as linear as you might expect.

(Source: Federal Reserve, FDIC, and Magnify Money estimates, June 2019. Cohorts with median balance of $0 indicate more than 50% of these households have no savings.)

Interestingly, household savings don’t start to meaningfully build until you reach the top 10th percentile of earners.

It makes sense that families—especially those with children—earning at or below the median (approximately $60,000) could have difficulty accumulating wealth. But what about households that earn $70,000, $90,000, and above?

For many, it comes down to lifestyle inflation. As income increases, so do expenses. Just got a raise? Great! Time to buy a new car and move into a nicer apartment!

Annual expenditures by income percentile in 2019. Notice a clear trend between higher incomes and higher expenses. (Source: Bureau of Labor Statistics;

In moderation, lifestyle inflation is completely reasonable. Purchase higher quality groceries, a more fuel-efficient vehicle, upgrade to a two-bedroom apartment with an office; the list goes on. It only becomes an issue when every penny of each raise gets funneled into nicer—and less necessary—goods and services.

Bringing this full circle, what if you just increase your savings target each time you receive a raise? That additional money would flow automatically into your savings and retirement accounts, instead of into frequent meals out and fancy cars.

We all want nice things. Why wouldn’t we? But by paying ourselves first, we can take the emotion and decision-making out of the equation. All temptation and guilt are then washed effortlessly away by the silent, unfeeling, overnight bank transfers.

Absolute bliss!

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