In the realm of personal finance, the concept of “paying yourself first” is often touted as a common fundamental principle. All it really refers to is the practice of prioritizing saving and investing a portion of your income before you allocate funds for other expenses. While it initially may be counterintuitive, this approach has tremendous potential and can significantly impact your long-term financial well-being – assuming you do it right.
Ed Rempel is a financial blogger and fee-for-service financial planner who has created thousands of financial plans for families looking to achieve financial freedom. His blog is #1 in Canada for a financial planner. In his blog, podcast and YouTube channel he explores a myriad of financial subjects, from expansive topics to simple concepts, providing years’ worth of insight to his readership and viewers.
“I think the idea of ‘paying yourself first’ sounds like a bit of a joke to the average person because we’re conditioned to prioritize making sure all of our financial responsibilities are taken care of so we can continue maintaining our current way of life,” says Rempel. “However, what people often forget is that the now is temporary, and the future can creep up on you if you aren’t prepared. So, making sure you’re allocating funds to yourself and your future is simple, but essential.”
Achieving the life that you want
By paying yourself first, you’re laying the foundation for achieving your financial goals and having the life that you want. It ensures that you consistently set aside a portion of your income for savings and investments.
First you need a financial plan to clearly detail your financial and life goals. It will tell you how much you need to invest each month or year to get there. Then invest that amount first from your pay, before paying all your bills.
This put you on track for the life you want. Once you have put aside what you need for your future, you can spend the rest without guilt.
This habit helps you avoid falling into the cycle of living paycheque to paycheque, providing peace of mind and a sense of security and freedom.
“Even people who make $100k per year are living paycheque to paycheque because they have a bad habit of increasing their lifestyle spending based on their incomes,” says Rempel. “What may surprise you is that some of the wealthiest people in those fancy neighbourhoods drive completely normal cars and wear completely average clothes. Just because you have access to wealth doesn’t mean you have to spend it on ‘leveling up’ – a better practice would be to live below your means and put that additional funding aside.”
Building Wealth Over Time
One primary benefit of paying yourself first is the opportunity to build your wealth over time. By consistently saving and investing, you harness the power of compounding growth. This means that your money has the potential to grow exponentially, as your initial savings generate returns, and those returns [in turn], generate even more returns.
“The earlier you start, the greater the impact of compounding, allowing you to achieve financial goals, such as retirement or homeownership, more efficiently,” says Rempel.
Prioritizing your goals and dreams
When you make a conscious effort to pay yourself first, you’re effectively prioritizing your goals and dreams. It ensures your financial aspirations receive the proper attention they deserve. Whether you want to start a business, travel the world, or retire comfortably, allocating funds towards your goals from the outset can help put you on the road to achieving them.
“We’re often taught not to put ourselves first in this world,” Rempel says with a chuckle. “I say nonsense – reinforce the importance of your financial future.”
Developing a Healthy Relationship With Money
Paying yourself first cultivates a better, healthier relationship with money. It instills a level of discipline, responsible financial habits, and a greater understanding of the value of delayed gratification. Rather than spending your money impulsively and regretting it later, this approach instead encourages thoughtful spending decisions and emphasizes the importance of long-term financial success. As a result, you become far more mindful of your financial choices and develop greater control over your finances.
“Paying yourself first is a crucial financial strategy that offers a multitude of benefits. By making saving and investing a priority, you establish stability,” says Rempel. “Incorporating this practice into your financial routine can transform your financial trajectory and set you on a path towards long-term success. It’s only one tool in the toolbox, but it’s a good jumping-off point to get started with.”