What Is Pay Yourself First?
Let me explain what 'pay yourself first' really means—it's a mindset and phrase you'll hear a lot in personal finance and retirement planning. It pushes you to save money right off the bat, before you spend it on anything else. If you take some of your paycheck and put it straight into a savings or investment account—that's paying yourself first—your savings will start to build up over time.
That said, this advice isn't going to work for everyone; it's just not realistic in some situations.
Key Takeaways
This strategy is all about ramping up your savings and investments on a consistent basis. The main idea is to ensure you've set aside enough income for saving or investing before you even think about monthly bills or those impulse buys. And looking at Federal Reserve data, it's clear most Americans aren't saving enough for retirement or even short-term emergencies.
Building Savings
A lot of personal finance experts and retirement planners swear by the 'pay yourself first' approach because it guarantees you're adding to your savings every month. Those regular contributions can really add up to a solid nest egg in the long run.
When you're applying this method, you might choose different places to park your money based on what your goals are. It could mean setting aside a percentage of your paycheck for retirement accounts like a 401(k) or an IRA. Or you could just stick it in a basic cash savings account.
Essentially, paying yourself first is about growing a retirement fund, setting up an emergency stash, or saving for big goals like buying a house. If you can pull this off, it'll probably cut down on your stress levels—you'll have money ready for retirement and cash on hand for things like a car repair or surprise medical bills.
What Percentage of Americans Are Saving Money?
From a 2023 Federal Reserve report, over a third—37%—of Americans couldn't handle a $400 emergency with cash or equivalent, which is the same as 2022 but up from 32% in 2021. About 34% felt their retirement savings were on track in 2023, similar to 31% in 2022 but down from 40% in 2021.
Bankrate's Annual Emergency Savings Report shows over 27% of people have zero emergency savings, and 29% have some but less than three months' worth of expenses. Then 16% have three to five months, and 28% have six months or more. Breaking it down by age, Baby Boomers are way ahead with 46% having six months or more, compared to 25% for Gen X, 20% for Millennials, and just 11% for Gen Z.
What Is the Average Retirement Savings by Income?
Based on Federal Reserve surveys from 2016 to 2022, the average retirement savings for people aged 35 to 64 was around $331,000. Participation in retirement plans hit its highest since 2010.
For those in the bottom half of incomes, the average was about $55,000. Mid-to-high income folks averaged $227,000, and the top 10% had about $913,000.
Can You Use a Roth IRA As an Emergency Fund?
Some folks hesitate to put money into tax-advantaged retirement plans because they fear being stuck without cash for emergencies. But with a Roth IRA, you can actually access your contributions if you need to—since you've already paid taxes on them, withdrawals of those amounts are tax- and penalty-free. Planners warn you should only do this in real emergencies, as it dips into your future savings.
Earnings in the account are different; you can't touch them without conditions unless the account's been open for over five years. If you're under 59½, early withdrawals come with a 10% IRS penalty. There are exceptions for qualified withdrawals: after five years, you can pull earnings penalty-free for disability, up to $10,000 for a first-time home purchase or rebuild, or for beneficiaries after death.
Even if you pay taxes on earnings, you can avoid the 10% penalty for things like higher education costs or childbirth.
The Bottom Line
Pay yourself first boils down to this: when your paycheck comes in, stash some away in savings before you spend on bills or fun stuff. If you manage it, you'll build a fund that secures your future and handles emergencies.
But for many, this isn't doable—you might not make enough to save before paying essentials. If that's you, start small, even tiny amounts. The key is to make saving a habit, wherever you can.
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