Pay Yourself First: Automate your way to financial freedom

August 1, 2023

It was 2018 and the day before my next paycheck would hit.

I logged into my checking account eager to send money to my Roth IRA and emergency fund.

I thought for sure I’d have money left over this time.

But once again, I had managed to spend my entire paycheck.

I tried to budget. I tried to limit my spending in each category.

But every time money came up with new creative ways (aka brunch) to be spent before I could invest any of it.

I was in a job I didn’t love and was terrified of the possibility that I’d never figure it out.

Am I ever going to “get it together”? I'm a finance major. I work in finance. I'm surrounded by ultra wealthy clients, this is something I should be good at.

But the reality is, the “shoulds” in life aren't very motivating.

I didn’t create an exercise habit because it was something I “should” do. I didn't start reading more books because I “should”.

I work out because it makes me feel good and I read books because I value learning.

So why was I attempting to shame myself for my poor spending habits?

Everything changed when I dropped the “shoulds” and decided to use psychology instead.

And in 2018 this one switch increased my savings rate from 3% of my income to over 20%.

And today I save 60% using the same approach.

What did I do?

I prioritized myself.

Before Netflix got paid, before Chipotle got paid, before even my utilities or rent was paid, I decided I would be paid.

This is the simple but powerful personal finance concept of “Pay Yourself First”.

It's best said in “The Richest Man in Babylon”:

“I found the road to wealth when I decided that a part of all I earned was mine to keep.”

Because financial freedom was so important to me, I studied every method of saving I could find.

After trying elaborate budgets and discipline “hacks”, I found one of the simplest methods works.

Paying yourself first is powerful because it involves:

  • Automation: you don't have to rely on willpower or motivation after it's set up
  • Forced scarcity: you can’t spend your money if you never see it

So how do you set this up?

There are several ways and it depends where you are in your personal finance journey.

You could:

  • Increase your 401(k) contributions
  • Set up an automatic extra payment to your credit card debt
  • Set up automatic transfers from your checking to savings/investment accounts

The important thing here is to line it up with your pay day and automate it.

You may feel motivated now, but I can guarantee in 2 weeks when your paycheck hits life will get in the way, you’ll forget to invest your money, and the paycheck will be spent once again.

That’s the key.

Send your money off to work as soon as you can or you risk it being spent.