Pay Yourself First: Your Retirement Savings Starter Guide

What are the basics of a “pay yourself first” strategy?

Let’s talk about a powerful strategy that can significantly boost your retirement savings and set you on a path to financial security: “pay yourself first.” It might sound a little unusual, but it’s a simple yet incredibly effective approach to building wealth, especially for retirement. Think of it as prioritizing your financial future right from the start, instead of treating savings as an afterthought.

Essentially, “pay yourself first” means that before you pay any of your bills, before you spend money on entertainment, or even before you consider any discretionary spending, you allocate a portion of your income to your savings and investments – specifically for your retirement in this case. It’s about making saving a non-negotiable part of your financial routine, just like paying rent or utilities.

Now, why is this strategy so important, especially for retirement? Many people fall into the trap of the opposite approach: “pay your bills first, and save what’s left over.” The problem with this method is that, often, there’s very little “left over,” or even nothing at all! Life has a way of filling up your budget with expenses, both necessary and discretionary. If you wait to save until after everything else is paid for, saving becomes dependent on what’s remaining, which can be unpredictable and often insufficient.

“Pay yourself first” flips this script. It puts your savings at the forefront. By treating your retirement savings as a priority bill, you ensure that money is consistently set aside before it gets spent elsewhere. This creates a disciplined savings habit and makes saving a regular, automatic part of your financial life.

How do you actually implement “pay yourself first” for retirement savings? Here’s a breakdown of practical steps:

1. Determine Your Savings Goal (Even a Starting Point): While long-term retirement goals can seem daunting, you don’t need to figure out the exact dollar amount right away. Start with a percentage of your income. A common recommendation is to aim for saving at least 15% of your pre-tax income for retirement, but if that feels overwhelming initially, even starting with 5% or 10% is a huge step in the right direction. The key is to start and gradually increase your savings rate over time as your income grows or as you become more comfortable.

2. Automate Your Savings: This is the most crucial step to making “pay yourself first” work effectively. Set up automatic transfers from your checking account to your retirement savings account (like a 401(k), IRA, or other retirement investment account) on each payday. Treat this transfer like any other essential bill payment. You can usually set this up through your bank or your retirement account provider. Automation removes the temptation to skip saving in a particular month and ensures consistency.

3. Budget and Track Your Spending: To make room for “paying yourself first,” you might need to review your current spending habits. Creating a budget helps you understand where your money is going and identify areas where you can cut back. Even small reductions in discretionary spending, like eating out less frequently or finding cheaper entertainment options, can free up funds to allocate to your retirement savings. Tracking your spending, even for a month or two, can be eye-opening and help you make informed decisions about your finances.

4. Treat Retirement Savings as a Non-Negotiable Expense: Mentally categorize your retirement savings as a fixed, essential expense, just like your rent or mortgage. This mindset shift is powerful. Instead of thinking of saving as optional, you view it as a necessary part of your financial well-being. This will help you prioritize saving even when unexpected expenses arise.

5. Regularly Review and Adjust: As your income changes or your financial goals evolve, revisit your savings plan. If you get a raise, consider increasing the percentage you “pay yourself first.” Periodically review your budget and spending to ensure you’re still on track and identify any further opportunities to increase your savings rate.

By consistently practicing “pay yourself first,” you’ll be amazed at how quickly your retirement savings can grow. It’s a simple principle, but its impact on your long-term financial security can be profound. It’s about taking control of your financial future, building a solid foundation for retirement, and ensuring that you are prioritizing your own financial well-being right from the start. Remember, even small consistent savings over time can compound significantly thanks to the power of compound interest, making “pay yourself first” one of the most effective strategies for building a comfortable retirement.