Personal Finance

Pay Yourself First

“A penny saved is a penny earned.” Benjamin Franklin

First 10% Goes to Yourself

Always, always pay yourself first. Yes, you have bills to pay. There are student loans, car loans, credit card bills, and mortgages, but you should as much as possible, pay yourself first. I believe that during my entire career, I’ve always set aside money for retirement, from my first job to my current one.

In my first job working after college, I earned a whopping $30k/year. Even then, 8% of my income was automatically deducted into a savings program. On top of that, I saved $3k for my IRA (the maximum allowed at the time). At that time, I intentionally lived with my parents in order to keep my expenses low, which allowed greater savings.

Currently, I save more than 25% of my gross income. When I was on Wall Street, I often maxed out my yearly 401k contributions by mid-year, and sometimes saved more than 40% of my income. In no way am I boasting about my income or savings habit, but I just wanted to emphasize its importance. Some of you are thinking that I’ve been able to save a lot because I earn more, but it’s really an attitude. There was one year when I only worked part-time and earned less than $20k and I still contributed the maximum amount to an IRA. I had a roommate, continued to drive my 11-year old car, and ate mostly at home. It was living within my means that allowed to save a lot.

Regardless of your circumstances, do everything you can to pay yourself first. Set up automatic deductions for your 401k. Contribute to an IRA if your employer does not have a 401k. If you’re self-employed, set up a SEP-IRA or 401k. There are many vehicles out there, so there’s no excuse for you to not to do.

Watch this 1 minute video on the power of paying yourself first.

Pay Yourself First Saves Taxes

1 +1 = 2, right? When it comes to retirement savings, the answer is “no.” Let’s say you’re in the 28% tax bracket and you contribute $10k to your 401k, well, the net cash outflow from your paycheck to the 401k is not $10,000, but only $7,200. The $10,000 pre-tax contribution lowered your taxes by $2,800 ($10,000 x 28%). Basically, Uncle Sam is paying you to sock funds away for your retirement. Not sure about you, but Uncle Sam isn’t my favorite relative, and if he wants to give you a break, take it!

Related: How to Lower Your Investing Costs

Pay Yourself First or Pay Down Debt?

Are there times when it makes more sense to repay debts before saving for retirement? The answer is “yes.” If you have a lot of high interest (10%+) debt like credit cards, then it might make more sense to pay down debt first. Let’s say you have these options:

  • Contribute $10,000 to a 401K (and save $1,500 in taxes, assuming 15% tax bracket)
  • Pay down $10,000 of credit card debt with 18% interest

In this case, it would probably make more sense to pay down debt first because the interest (let’s assume simple interest for our example) of not paying it down would be $1,800. Contributing to a 401K would save $1,500. So just on the interest expenses vs. taxes paid, it’s more advantageous to pay down debt in this case. Using the same example, but assuming a 28% tax bracket, it’d be more advantageous to contribute to the 401k plan. At the same time, you don’t want to ignore the debt altogether, so a good compromise would be to pay down debt by $5,000 and contribute $5,000 to 401k. You don’t want interest to accrue on the credit debt, so doing both could make sense here.

Of course, each person’s circumstance is unique, but hopefully, these examples will invite readers to think about interest expenses and the taxes saved when evaluating whether to contribute to retirement savings versus paying down debt first.

Additional Resources:

Are You Paying Yourself First? at Forbes

Pay Yourself First at

Pay Yourself First: What It Means, and How to Do It at Wisebread


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