Pay Yourself First: The Secret To Saving?

The pay yourself first rule is often held up as the holy grail of saving. Alongside “spend less than you earn” and “live within your means”, it’s a pillar of personal finance.

But does it work? And how do you put it into practice? Let’s take a closer look.

What does pay yourself first mean?

Pay yourself first is a way of managing your money that puts saving first. As soon as your pay lands, you move your savings out before paying bills or spending on anything else.

It’s the reverse of what most people do: spend what they like, then try to save whatever is left.

Does pay yourself first work?

Yes. Paying yourself first puts your financial goals at the top of the list. Whether you’re building an emergency fund, saving for your first home or saving for retirement, you make progress every payday.

There are two reasons it works.

1. It removes temptation

Companies spend huge sums on marketing to get you to part with your money. They create wants to keep you buying, replacing and upgrading. If the cash is sitting in your current account, that marketing is more likely to work on you.

Moving your savings out as soon as you’re paid makes it much harder to spend them on things you don’t really need.

2. You save consistently

I never used to manage to save. I blamed my low salary and the cost of living. In truth, I didn’t save because saving came last on my list. My old order looked like this:

BILLS > LEISURE > SAVINGS

Saving was an afterthought, so it never happened. Once I learned about personal finance and started paying myself first, I suddenly found I could save. Here’s my order now:

SAVINGS > BILLS > LEISURE

Saving is the first “bill” I pay every month. Treat savings as your first bill and you’ll find you always manage to save.

What is the best way to pay yourself first?

I first came across the idea in Rich Dad Poor Dad. Robert Kiyosaki describes two ways of handling your money.

The usual way is to pay your bills first and save or spend whatever is left.

The second way is to pay yourself first: before paying anyone else, set aside your savings and invest them in assets that generate income. That income pays your bills or gets reinvested. Over time, your investment income grows until it covers all your costs. That’s the blueprint for financial freedom.

But a word of caution. Taken literally, the book suggests paying yourself a set amount first, then working out how to cover your mortgage and other bills. The idea is that the pressure forces you to find the money. In Kiyosaki’s words: “Paying yourself first is not easy. In fact, it can be scary, especially when the bills are piling up.”

In my opinion, that’s terrible advice. Investing money you need for the mortgage won’t make you rich. It will make you stressed, and missed payments can bring late fees, damage your credit score and put your home at risk.

If you’d rather avoid the sleepless nights, use a gentler version:

1. Set up a standing order that moves your savings the day after payday.
2. When you create your budget, list that standing order as a bill that must be paid.
3. Make sure your income covers all your bills, savings included.

That’s it: an automatic system that saves money every month. I call it the “pay yourself automatically” rule. It doesn’t have the same ring, but it works and it’s stress-free.

Many banking apps now make this even easier, with savings pots you can fill automatically on payday. Keep your savings in an account that pays a good rate of interest, ideally with a different bank so you’re not tempted to dip in.

What percentage should you pay yourself first?

How much you save depends on your goals and how badly you want them. The more you put towards your future, the more your current lifestyle will feel it.

I save the first 20% of every pay packet. My savings rate used to be higher, 50% when I was pursuing FIRE, but I’m happy to save less and enjoy a better lifestyle now.

Example: on take-home pay of £2,500 a month, 20% is £500. That’s £6,000 a year before any interest or investment growth.

There’s no one-size-fits-all figure, except perhaps for retirement. How much you need to put into a pension depends on your age, when you want to retire and the returns you get. A common rule of thumb is to take the age you start saving for retirement, halve it and save that percentage of your pre-tax salary for the rest of your working life. Start at 30 and you’d aim for 15%. Your employer’s contributions count towards it.

If you’re auto-enrolled at the minimum 8% of qualifying earnings, the rest could come from paying a little more into your workplace pension, a SIPP or a Lifetime ISA.

Saving 15% might feel impossible now. But your savings rate can rise as your career progresses and you earn more, as long as your lifestyle doesn’t grow at the same pace. Start with what you can, then look for ways to save more. What matters most is building the habit of paying yourself first.

Wrapping it up

Many people feel they don’t earn enough to save. Their mistake is trying to save what’s left over.

Treat savings like any other bill that has to be paid and you’ll never “forget” to save. A standing order is the easiest way to do it. It takes the willpower out of saving and builds wealth over time. After a few months, you won’t even notice the money leaving your account.